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Bringing the Empire of Debt to its Knees

Bringing the Empire of Debt to its Knees.

Addison Wiggin

Posted Feb 7, 2014.

“The relentless credit deluge in America is beyond belief…” Kurt Richebächer bemoaned in 2005. “Credit growth, financial and nonfinancial, in the United States has effectively run riot in the short time since 2000.”

Fast-forward nearly a decade and we have no doubt Kurt would express himself with even greater discontent if he were with us now. From CNN Money this afternoon:

“The CBO projects that under current policies, public debt will reach $21 trillion — or 79% of GDP — by 2024. That would be its highest level in more than 75 years and would leave debt at nearly double its long-term average of 40% of GDP.”

What would Kurt say if he were here today? Probably that a nation, no less than you or I, should earn its money before spending it. And that the U.S. may very well thrive as its public and private debt climbs ever higher… yet it’s probably in spite of indebtedness, not because of it…

…the size of its interest payments is as likely to bring the empire of debt to its knees as anything.

At writing, the national debt sits at $17.3 trillion. The debt limit will need to be raised, according to Treasury Secretary Jacob Lew, lest the U.S. default on some of its obligations. That’s old hat.

What’s more interesting is the interest on the debt. After all, the size of its interest payments is as likely to bring the empire of debt to its knees as anything.

According to the CBO, the U.S. will shell out “only” $233 billion to service its debt this year. That’s a little more than 1% of GDP. At the same time, the federal deficit is set to decline this year and next — to nearly half the amount of 2009′s deficit.

We would humbly posit, however, that digging yourself deeper into a hole isn’t an enviable position… no matter how slowly you dig. This is especially true while interest rates are so low.

What happens when they go back up, as they inevitably will?

The answer, according to the CBO report, is that interest payments will make up the biggest portion of the federal deficit. “By 2024, it will reach $880 billion, or 3.3% of GDP,” reports CNN. That will be 80% of the projected $1.1 trillion deficit a decade from now. That amount rivals what we spend on Medicare alone right now.

It sounds like the end of the road for the ol’ US of A… then again, what do we know? When we produced our film I.O.U.S.A. in 2007, the federal debt was about $9 trillion. Today, it’s nearly double that. If we’ve learned anything, it’s that these things can go on a lot longer than you’d figure. Alas, for all of our uncertainty about the journey’s time frame… the destination is certain.

“For decades,” Dr. Richebächer told us in France two years prior toI.O.U.S.A., “one dollar added to GDP in the United States was tied to $1.40 in additional debt. But all that changed in the 1970s. Since then, the debt-to-GDP growth relationship has skyrocketed. Now for one dollar of additional GDP, there is $4 in additional debt.”

How Much Debt it Takes to Produce $1 of Additional GDP

The good doctor might have been engaging in a bit of hyperbole. Comparing the GDP numbers from the Commerce Department with the total credit market debt as reported by the Federal Reserve, it took $3.20 in debt to produce $1 of additional GDP at the time of that interview. But the acceleration since the 1970s is undeniable.

The good news — if that’s what you can call it — is that the upward spiral reversed as the “official” recession ended in mid-2009. We’re now back to $3.44 — the level where it was when Dr. Richebächer died, in August 2007. It’s bad news when you consider that much of that debt has been frittered away on entitlement programs, which have exacerbated the problems they were created to solve.

Regards,

Addison Wiggin
for The Daily Reckoning

Ed. Note: In the Daily Reckoning email edition, from which this essay was taken, Dr. Marc Faber followed Addison’s musings with an exploration of some specific instances of government failure. Specifically, schemes like the war on poverty… a decades-long mission to flush $20 trillion down a massive toilet. But these essays are just one benefit of reading The Daily Reckoning email editionbefore it hits the Daily Reckoning website… Readers of the email edition are also treated to several chances to discover real, actionable profit opportunities every single day. So don’t wait. Get the full story by signing up for The Daily Reckoning, for FREE, right here.

Addison WigginAddison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times MagazineThe EconomistWorthThe New York TimesThe Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

Greece Is Still Bankrupt |

Greece Is Still Bankrupt |.

February 6, 2014 | Author 

A ‘Flood of Good News’

As der Spiegel recently reported, the Greek government is intent on smothering its reluctant creditors with good news (in order to be able to accumulate a reasonable amount of such, the last ‘troika’ assessment has apparently been subject to numerous delays):

“A SPIEGEL report that German Finance Minister Wolfgang Schäuble is considering a third rescue package for Greece has electrified the struggling nation. Athens wants to impress its creditors with a stream of good news. But it still has a long list of unkept promises. New loans are welcome, but don’t ask us for any new austerity measures. This pretty much sums up Athens’ reaction to Germany’s reported willingness to approve further loans to Greece to cover the country’s multi-billion euro projected financing gap in 2015-2016.

Although there was no official reaction to SPIEGEL’s report, published on Monday, government sources say that Berlin’s intentions were known to Prime Minister Antonis Samaras, adding that Germany will not pull the rug from under Greece’s feet, especially with the European election due in May.

But the Greek government has also made clear that it will not accept a new round of measures or a continuation of what are perceived by many in Greece as the asphyxiating and humiliating controls by the troika of European Commission, European Central Bank and International Monetary Fund.

Finance Minister Yannis Stournaras is preparing Greece’s position ahead of the troika’s arrival. With a fresh round of bargaining looming on the new loans, he promised an avalanche of “impressively good news” in the coming days to show that Greece doesn’t need any further belt-tightening. It only needs to press on with its structural reforms, he said.

According to a Greek Finance Ministry official, the good news will include the first increase of retail sales in 43 months, and the first rise in the purchasing managers’ index in 54 months. The “super-weapon” in Stournaras’ arsenal, however, is the hefty 2013 primary budget surplus, now estimated at €1.5 billion, well above the official budget forecast of €812 million.

The same official said the expected good news was the reason why Athens doesn’t want the troika to return earlier to conclude a much-delayed round of inspections that started in the autumn.Stournaras is expected to present Greece’s accomplishments to German officials when he visits Berlin later this week. The final details of his trip are still being worked out. Athens also plans a return to the markets by the end of 2014 in what it believes will be a definitive sign that the Greek economy is out of the woods.

With the leftist opposition alliance Syriza leading most opinion polls, some observers say the Greek government needs to be able to show success soon. Athens was therefore quick to react to the reports about new loans, telling the public it should not fear a new wave of measures.

(emphasis added)

By all accounts SYRIZA would indeed win elections if they were held today – by a solid margin of almost 8% over its nearest rival New Democracy, the party of current prime minister Antonis Samaras. Electoral support for his coalition partner PASOK – for a long time the ruling party in Greece – has all but disappeared. Even the Stalinist KKE is set to grab a bigger share of the vote.

The upcoming European as well as municipal elections in Greece are bound to see SYRIZA winning comfortably. Meanwhile, the coalition’s majority in parliament has shrunk to a mere three MPs. It won’t take much to topple it, hence all the frantic activity described above.

Greetings from Charles Ponzi

So what’s the problem if there are all those good news, including a ‘hefty primary surplus’? As an aside, said surplus is already greedily eyed by various Greek bureaucrats who have suffered salary cuts which they are currently challenging in court. As the WSJ recently reported, a few European finance ministers held a ‘private meeting’ over Greece recently, to which their Greek colleague wasn’t invited. The problem? The month of May:

“Top officials peeled away from colleagues after a gathering of euro-zone finance ministers in Brussels on Monday evening for a private meeting to discuss mounting concerns over Greece’s bailout. Greek Finance Minister Yiannis Stournaras, who was briefing the press in a building across the street at the time, wasn’t invited.

High-level officials from the International Monetary Fund, the European Commission, and the European Central Bank, as well as senior euro-zone officials and the German and French finance ministers were present.

The meeting reflects anxiety that Greece could yet disturb the relative calm in euro-zone financial markets. But the issue is unlikely to come to a head until May when Greece needs to repay some €11 billion ($14.85 billion) of maturing government bonds.

The private meeting, confirmed by several people with direct knowledge of the talks, comes as Athens struggles to meet some of the conditions set by its official creditors for further payouts from bailout funds. The Monday meeting was held to discuss how to press Athens to forge ahead with unpopular reforms to its labor and product markets, and how to scramble together extra cash to cover a shortfall in the country’s financing for the second half of the year that is estimated at €5 billion to €6 billion.The meeting was inconclusive, people familiar with the situation said.

(emphasis added)

An € 11 billion bond repayment and a shortfall of  € 5 to 6 billion? Oh well, that’s why it’s called a “primary surplus” instead of just a “surplus”. “Primary” means it’s not really a surplus – only that it would be one, if not for the debtberg Greece must service. However, if servicing said debtberg costs more than Greece’s government can actually bring in, then its entire debt edifice remains a Ponzi scheme. Only, contrary to other governments that are able to finance their own Ponzi debt schemes in the markets, Greece needs Ponzi financing from elsewhere, or to be precise, from unwilling tax cows residing elsewhere. That is currently the main difference. The problem for all the other States is that it is important that people don’t start thinking too much about the essential Ponzi nature of government debt. If they do, then there might be another debt crisis. After all, nearly the entire euro zone sports a lot more debt today (both absolute and relative to GDP) than at any time during the most severe crisis months. That fact in turn means that the current calm in the markets really hangs by the thinnest of threads, propped up by misplaced confidence alone. Meanwhile, the much-lamented ‘banks-sovereigns doom loop’ has become worse by almost an order of magnitude in countries like Italy and Spain.

On the other hand, selling yet another bailout of Greece to the voters in creditor countries is quite a tall order at this stage, with the eurocracy already being subject to much scorn and revulsion (all of it well deserved).

What to do?


trojan-horse-239x300Helloooo, ‘European partners’ … thinking about me lately?

(Image source: The Web / Author unknown)


Let Us ‘Stipulate For All Times to Come’

Ludwig von Mises once wrote with regard to the inexorably growing mountains of government debt around the world:

“The long-term public and semi-public credit is a foreign and disturbing element in the structure of a market society. Its establishment was a futile attempt to go beyond the limits of human action and to create an orbit of security and eternity removed from the transitoriness and instability of earthly affairs. What an arrogant presumption to borrow and to lend money for ever and ever, to make contracts for eternity, to stipulate for all times to come!”

In the case of Greece, the eurocrats seem to have precisely such an arrogant presumption in mind:

“The next handout to Greece may include extending the maturity on rescue loans to 50 years and cutting the interest rate on some previous aid by 50 basis points, according to two officials with knowledge of discussions being held by European authorities.

The plan, which will be considered by policy makers by May or June, may also include a loan for a package worth between 13 billion euros ($17.6 billion) and 15 billion euros, another official said.Greece, which got 240 billion euros in two bailouts, has previously had its terms eased by the euro zone and International Monetary Fund amid a six-year recession.

“What we can do is to ease debt, which is what we have done before through offering lower interest or extending the maturity of loans,” Dutch Finance Minister Jeroen Dijsselbloem, who heads the group of euro finance chiefs, said yesterday on broadcaster RTLZ. “Those type of measures are possible but under the agreement that commitments from Greece are met.”

(emphasis added)

Good luck with that last one boys. Greece is still the same over-bureaucratized corrupt swamp it was prior to the bailouts. There will be a deep freeze in hell before the ‘commitments are met’.

Since we mentioned the banks earlier, here is the next non-suprise:

“As Greece seeks to meet its aid conditions and unlock more money from its existing bailouts, it’s also looking for ways to make the most of 50 billion euros that was set aside for bank recapitalization. The country had hoped some money might be left over for other financing needs. That now looks less likely because the Greek banks will need more capital, according to an EU official close to the bailout process.”

(emphasis added)

You really couldn’t make this sh*t up.

Conclusion:

This is what happens when unsound debt is artificially propped up instead of being liquidated. Now there is a never-ending drama. Creditors keep throwing good money after bad, into what appears to be a kind of financial black hole – money falls inside, but it looks like it will never come back. Meanwhile, the population of Greece has been so thoroughly ground into the dirt by the crisis that it is prepared to rather vote for Nazis and communists than continue with the situation as is. What a great accomplishment!


broken-euroQuick, this thing still needs some more glue …

(Image source: The Web / Author unknown)

India’s Central Bank Governor: “International Monetary Cooperation Has Broken Down” | Zero Hedge

India’s Central Bank Governor: “International Monetary Cooperation Has Broken Down” | Zero Hedge.

India’s recently crowned central bank head (and predecessor of the IMF’s Nostradamal Olivier Blanchard), Raghuram Rajan, has not had it easy since taking over India’s printer: with inflation through the roof, and only so much scapegoating of gold as the root of all of India’s evils, Rajan announced an unexpected 50 bps interest rate hike two days ago in an attempt to preempt the massive EM capital flight that has roundhoused Turkey, South Africa, Hungary, Argentina and most other current account deficit emerging markets. Whether he succeeds in keeping India away from the EM maelstrom will be unveiled in the coming days, although if last summer is any indication, the INR has a long way to fall.

Hinting that the worst is yet to come, was none other than Rajan himself, who yesterday in an interview in Mumbai with Bloomberg TV India, said that “international monetary cooperation has broken down.” Of course, when the Fed was monetizing $85 billion each and every month and stocks could only go up, nobody had a complaint about any cooperation, be it monetary or international. However, a 4% drop in the S&P from its all time high… and everyone begins to panic.

The reason for Rajan’s displeasure is because he believes that the DMs owe the EMs a favor: “Industrial countries have to play a part in restoring that, and they can’t at this point wash their hands off and say we’ll do what we need to and you do the adjustment.”Sorry Raghu – Bernanke hightailed it out of here and as Citi’s Steven Englander pointed out yesterday, left you “to twist in the wind.” Feel free to submit your thoughts on the matter in the overflowing complaint box in the Marriner Eccles lobby.

Instead of doing this, however, Rajan continued complaining to Bloomberg:

“Fortunately the IMF has stopped giving this as its mantra, but you hear from the industrial countries: We’ll do what we have to do, the markets will adjust and you can decide what you want to do,” Rajan said. “We need better cooperation and unfortunately that’s not been forthcoming so far.”

Rajan said yesterday developed countries might not like adjustments emerging markets take to cope with the outflows, without elaborating on specific measures. His surprise Jan. 28 move to raise the benchmark repurchase rate by a quarter point – – adding to increases of 50 basis points since he took over the Reserve Bank of India in September — was to stem consumer-price inflation running at close to 10 percent, he said.

 

“In an environment when there is external turmoil, we have to get our house in order and we can’t postpone that,” Rajan said. “So a collateral benefit of getting inflation down is that you also strengthen the belief in the value of the rupee.”

“When there is huge outside turmoil, even today post the Federal Reserve withdrawing stimulus further, it is extremely important that we both be seen on the same page.”

You know – this is truly wonderful: for once a central banker admits that his peers are on the verge of losing control of the globe – of course not in those words as the result would be sheer panic upon the realization that central bankers are just as clueless as everyone else – because while conducting central planning in one country is somewhat feasible for a period of time, doing so across every country across currencies, and capital markets, is impossible. And the Indian knows this.

He also knows that in a worst case scenario, the Indian Rupee will crash and burn and make last year’s record devaluation of the INR seem like breakfast at Gideon Gono’s. Which means that doing the right thing would mean allowing the people – his people – to preserve their wealth in the only real currency that will withstand whatever Emerging Market collapse may be headed this way. Gold.

Instead, what did the Indian Central Bank do? This.

  • Jan 21 – The government raises the gold import duty by 2% to 6%.
  • Jan 22 – The government more than doubles the duty on raw gold to 5%.
  • Jan 30 – Finance Minister P. Chidambaram says there are no plans for additional taxes or curbs on gold imports.
  • Feb 1 – The Reserve Bank of India (RBI) plans to introduce three or four gold-linked products in the next few months.
  • Feb 6 – The RBI says it would consider imposing value and quantity restrictions on gold imports by banks.
  • Feb 14 – The central bank relaxes rules on gold deposit schemes offered by banks by allowing lenders to offer the products with shorter maturities.
  • Feb 20 – The Trade Ministry recommends suspending cheaper gold jewellery imports from Thailand.
  • Feb 28 – India keeps its gold import duty unchanged in its annual national budget, defying industry expectations.
  • Feb 28 – India proposes a transaction tax of 0.01% on nonagricultural futures contracts, including for precious metals.
  • March 1 – The Finance Minister appeals to people not to buy so much gold.
  • March 18 – The Reserve Bank of India says it is examining banks that sell gold coins and wealth management products to identify “systemic issues”, with a view to closing any legal loopholes.
  • April 2 – The Finance Ministry suggests it is unlikely to raise the import tax on gold further to avoid smuggling and would instead introduce inflation-indexed instruments.
  • May 3 – The RBI restricts the import of gold on a consignment basis by banks.
  • June 3 – The Finance Minister says India cannot afford high levels of gold imports and may review its import policy.
  • June 5 – India hikes the gold import duty by a third, to 8%.
  • June 21 – Reliance Capital halts gold sales and investments in its gold-backed funds.
  • June 24 – India’s biggest jewellers’ association asks members to stop selling gold bars and coins, about 35% of their business.
  • July 10 – India’s jewellers announce they might continue a voluntary ban on sales of gold coins and bars for six months.
  • July 22 – The RBI moves to tighten gold imports again, making them dependent on export volumes, but offers relief to domestic sellers by lifting restrictions on credit deals.
  • July 31 – India hopes to contain gold imports well below the 845 tonnes that were shipped last year, the Finance Minister says.
  • Aug 13 – India hikes the import duty on gold for a third time in 2013, to 10%. Duties for silver and platinum are also increased to 10%. The customs duty on gold ore bars, ore, and concentrate are increased to 8% from 6%.
  • Aug 14 – India turns the screws on gold buying again, banning imports of coins and medallions and making domestic buyers pay cash.
  • Aug 29 –  India considers plan to allow commercial banks to buy gold direct from ordinary citizens
  • Sept 19 – India hikes import duty on gold jewerly to 15%

And so on.

So thank you for your fake concern Raghuram, but if you really wanted to help your people when the hammer hits, you would lift all capital controls on gold now, and allow your population to preserve their wealth in the only way they have known for the past two thousand years – by converting it into the barabrous relic. And since you won’t, enjoy reaping what you and your demented central-planning peers have sown.

Fed’s Dirty Little Secret: “The Gold Isn’t There… Exists as Paper IOU’s”

Fed’s Dirty Little Secret: “The Gold Isn’t There… Exists as Paper IOU’s”.

The assumption by global depositors who have entrusted their national savings with the Federal Reserve and US Government has always been that when they request to repatriate their holdings the Fed would simply open the vault, access said assets and ship them back to where they belong.

That’s exactly what Germany expected would happen last year when the country requested that the Federal Reserve return about one-fifth of their gold reserves. But that’s when things got really dicey. The Fed announced that Germany’s gold would be returned… but it would take seven years to get back home.

The response to Germany’s request turned heads all over the world and raised concerns that the Federal Reserve had squandered its gold holdings. But this isn’t the only red flag that was raised. Public pressure reached such levels that the Fed was forced to take steps to maintain confidence in its operations, so it started shipping gold to Germany. Except it turns out that the gold being sent back to the Bundesbank wasn’t actually German gold. It contained none of the original serial numbers, had no hallmarks, and was reportedly just recently melted.

The implications are earth shattering and hit the very core of the problems facing America today. The whole system as it exists is just one big paper IOU.

In this must-watch interview with Future Money TrendsJefferson Financial CEO Brien Lunden weighs in on Germany’s gold, what is happening at the Fed and what other central banks are doing right now. Brien also shares his thoughts on where the gold market is today, what to expect in coming years as gold supplies tighten up, how mining companies like Brazil Resources are taking advantage of the current environment, and how to profit from gold in coming years.


(Full transcript and interview)

For the reply to be that it would take seven years for this Gold to be sent back to you, your Gold to be sent back to you, was an obvious admission that the Gold just isn’t there.

Yes, it’s an admission that the German reserves were not still sitting there in the vault in the same form that they were sent there after WWII. They were not the original Central Bank Gold bars, same serial numbers etc. It’s an admission that at some point since then, that Gold has been used for other purposes.

So the dirty little secret here, is that a significant portion of central bank Gold reserves, including the U.S., don’t exist now in their original bar form. In fact, they exist as IOU’s, paper IOU’s, from the very banks that were bailed out in 2008 by the Federal Reserve.

So the Gold isn’t there, and the secret that they’re hiding is that it’s been replaced by IOU’s, and importantly those IOU’s are for Gold that was borrowed at much lower prices.

The Fed, through their recent actions, has essentially admitted that the gold stored in their vaults isn’t really there. Just as our government refuses to be openly transparent to with the American people, the Fed has resisted all calls to open their books (and vaults) to impartial third-party accountants for review.

The whole system, it seems, is now operating on IOU’s. Be it consumers, banks, the Fed or even the US government, all of the US dollars being exchanged are nothing but worthless pieces of paper, because given the lack of transparency at the Fed, we have to assume that the physical assets supposedly backing all this currency have already been spent.

Are we wrong in making this assumption?

If you were to store some emergency funds with a friend who promised to get them back to you whenever you asked, and then you ask and are told it’ll be a few years before he’ll get you the cash, what assumption would you make?  That your friend has the money on him right now, or that he’s used it for other purposes and doesn’t really know exactly when he’ll have it available for repayment?

Our entire consumer economy, as well as the credit worthiness of our nation, is built upon confidence. It’s took decades to get America in a position where our country’s monetary issues and services would be trusted by the international community. It’s taken just a few years for that confidence to be lost.

It’s now only a matter of time before our creditors and global investors pull the plug on the whole thing.

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