How Will the U.S. Recover from the Debt Crisis?

Bad is never good until worse happens.

~Danish proverb

Source: Bank of Japan

The Japanese markets have still not recovered after the real estate bubble, which lasted from 1986-1990, despite having dropped interest rates to zero and throwing volumes of money at the problem. Look at the above chart - total Debt in 1990 was roughly 150 of GDP. Today, total debt is close to 290% and the market is still in a funk. Could this be what lies in store for the U.S?

In 1990 the Nikkei was at 40,000; today, almost 20 years later, it is having a hard time trying to make it to the half way point despite all the money the government has infused into the economy. Worse yet, the main downward trend line is still intact and after all that money the Japanese government threw at the economy, the Nikkei is trading close its lows; currently, it's at 9,695, roughly 75% below its all time high. Let’s remember that Japan is a big exporter and manufacturer of goods. The US, on the other hand, has lost most of its manufacturing capacity and imports far more than it exports. It’s starting off on an incredibly bad note in comparison to the Japanese.

We have listed charts from two sources; the differences are minuscule at most.

Source: Steve Keens Debt watch

Source: Ned Davis research

Surprise, surprise, the picture is simply terrible. Total debt now accounts for roughly 380% of GDP, and we have only just begun spending. The Japanese started from 150, and it took them to 20 years to push it to 250%. We, on the other hand, are starting at almost 380%, and we have just begun our so called stimulus programs. The government is projecting a deficit of 9 trillion dollars in the next 10 years; they moved this estimate up from 7 trillion to 9 trillion in less than one year. If they increased their estimates by almost 28% in one year, do you think this estimate is going to remain unchanged for 10 years? They also raised the deficit for 2010 by 19% to 1.5 trillion.

Now here is the massive difference between the Japanese and the U.S. The Japanese consumer has saved a huge amount of money and continues to do so, they can, and to some degree they have, indirectly financed this debt by purchasing government paper. The U.S. consumer, on the other hand is broke and strung by his heels with debt; we had two years where the savings rate was actually negative (2005 & 2006) - talk about arrogance and foolhardiness. So we are entering into this mess with a Debt to GDP ratio that is 2.6 times larger than the Japanese and with the consumer completely broke. To make matters worse, we are fighting two wars and trying to solve a multitude of problems when the nation is for all intents and purposes almost bankrupt. Let's not forget the rising unemployment rate which officially is close to hitting 10% but unofficially (the number of individuals that have given up looking for work plus those that are still looking for work) is probably well over 15%.

Going forward, the situation is only going to get worse as the government is going to have to continually create money out of thin air to fund many of its social programs, fund the two large scale wars that are costing this nation several billion dollars a month and pour billions and billions into Medicaid and eventually into social security. The only hedge therefore would be to get into commodity based assets. Investors should use all strong pull backs to either add to or open up new positions. For example, right now the natural gas sector is relatively cheap and undervalued, some plays in the agricultural sector are also rather cheap and so some positions could be opened up in these sectors right now. We would wait for pull backs in the other commodities based sectors before opening up new positions as many of them have experienced very strong upward moves in the past few months.

Investors looking for a hedge can consider the following ETFs:

In the natural gas sector we have [[UNG]], GAZ and FCG, which gives you a bit more bang for you buck as it invests in the companies that actually produce the gas as opposed in natural gas futures.

In the agricultural sector the following ETFs should be considered:

• MOO - We would wait for a pull back before opening up new positions.
• DBA
• DBC - It’s a bit more diversified than DBA as it holds positions in Gold, heating oil and crude..

After stronger pull backs the following ETFs can be considered - USO, GDX, GLD, CUT, AGQ, KOL, PSAU, PSTL, etc.

It is a painful thing to look at your own trouble and know that you yourself and no one else has made it.

~Sophocles, BC 496-406, Greek dramatist

Disclosure: We have positions in UNG and are planning on opening several new positions in key stocks and some of the ETF's listed above.

Comments

[aussiereader4:]

Austerity with a large dose of inflation. I suspect a return to 1970's style stagflation is the answer. It was the debt bubble that followed Reaganomics that started this.

Oct 25 07:49 AM

[SageNot:]

Not to worry, at the rate that Obama's ranking has fallen, 2010 w/b the Democratic Congress's Waterloo, & maybe the Sr. Citizens that Obama is targeting will get the "IMPEACHMENT" movement started for the fight against the Socialistic damage that our President & his henchmen have perpetrated upon us. I can hardly recognize what my country looks like these days, BUT WE'RE NOT JAPAN, where did you get that idea from?

Oct 25 09:26 AM

[The Geoffster:]

The definition of insanity is doing the same thing over and over and expecting to get a different result.

Oct 25 10:10 AM

[Brent Day:]

The sooner Obama and the current dems are gone, the better. The U.S. needs to take a dose of very tough medicine now and for several years in the immediate future; fiscal discipline - cut spending and get the deficit under some sort of control with the aim of one day being able to start paying down the debt, stabilize then cut taxes to allow free enterprise and capitalism to work and lead the U.S. economy into the future rather than gov

Oct 25 10:53 AM

[Smarty_Pants:]

"We're freakin' doomed."
- Mogambo Guru

Oct 25 11:22 AM

[knoc:]

And who exactly do you think is going to do this? The "lower taxes and increase spending" Republicans? Wasn't it G.W.B. who cut taxes in wartime, a first in U.S. history? Wake up!


On Oct 25 10:53 AM Brent Day wrote:

> The sooner Obama and the current dems are gone, the better. The
> U.S. needs to take a dose of very tough medicine now and for several
> years in the immediate future; fiscal discipline - cut spending and
> get the deficit under some sort of control with the aim of one day
> being able to start paying down the debt, stabilize then cut taxes
> to allow free enterprise and capitalism to work and lead the U.S.
> economy into the future rather than gov

Oct 25 11:51 AM

[Glen L.:]

I agree with the view that the US will "recover" from the debt crisis by defaulting on the entitlement programs, primarily Social Security and Medicare which will see gradual, piecemeal reductions in benefits. Congress will attempt to negate the "third rail" by targeting minority sectors within the geezer population for reduced benefits, never enough to seriously threaten their incumbency in the next election.

I also think the US will take extraordinary measures to save the dollar and continue to pay the interest on the foreign debt. This means rising interest rates, much higher taxes, and a true depression in the not distant future. The alternative -- printing money to pay -- is the road to Zimbabwe. I don't believe the Fed will allow that to happen.

The longer range forecast is for the collapse of the fiat dollar anyway, a return to the gold standard, the abolition of the Fed, and the end of the American empire. We can only hope.

Oct 25 12:07 PM

[User 369699:]

THE CHARTS DON'T ADD UP !!!!!!!!!!!!!!!!!!!!!!!!

Oct 25 02:53 PM

[Gregman2:]

Private debt seems the culprit, and securitization which allowed its vast expansion means that many of the assets are still being carried on institutional books and have yet to be written down.

Oct 25 06:25 PM

[Spartacuss:]

This all is what we have inherited via Keynsianism and Socialism. Note that even witth the abolishment of social programs (very unlikely as this is political suicide) the debts can never be repaid.

What every one misses it seems to me is that there is this "hockey stick" phenomena. This in mathematics amounts to a parabolic function where the rate keeps increasing without end and once a certain threshold is reached the funcition essentially becomes vertical; the hockey stick effect, the big L. We are there, and there is no way we can even monitize the debt anymore because the function is now moving so rapidly that any measure of monitization will be swamped by new debt faster than older debt can be monitized.

Folks we have entered the monitary twilight zone of runaway inflation. It doesn't seem that way as for now we are deleveraging, however this deleveraging phase will not last long, perhaps another couple of years but look out! The expansion of the Fed balance sheet will turn into money on the street before you know it and then the moon shot: runaway inflation and it cannot be avoided.

What to do? Buy precious metals, what else is there?

Oct 25 11:37 PM

[Mark Anthony:]

No one is able to save the dollar. It is not the matter of the political will of the US federal government, or the FED. It is the matter of the capability of the US government and the FED. Both entities need a bailout themselves, let alone save the currency.

High interest means nothing if the principal currency itself is losing value faster than the interest rate. It will not be able to attract foreign buyer of our debt. It also means the FED needs to crack up the money printer more to just pay for the interest.

High taxation will mean the money will be driven out into foreign land, leaving no jobs and no tax revenue left to be collected.

An even worse outcome will be that individual states may decide that the high federal tax they pay is not worth the benefit of staying in the union. There could be serious talks of secession from the union. That will really collapse the dollar and even the federal government itself!

seekingalpha.com/insta...

On Oct 25 12:07 PM Glen L. wrote:

> I agree with the view that the US will "recover" from the debt crisis
> by defaulting on the entitlement programs, primarily Social Security
> and Medicare which will see gradual, piecemeal reductions in benefits.
> Congress will attempt to negate the "third rail" by targeting minority
> sectors within the geezer population for reduced benefits, never
> enough to seriously threaten their incumbency in the next election.
>
>
> I also think the US will take extraordinary measures to save the
> dollar and continue to pay the interest on the foreign debt. This
> means rising interest rates, much higher taxes, and a true depression
> in the not distant future. The alternative -- printing money to pay
> -- is the road to Zimbabwe. I don't believe the Fed will allow that
> to happen.

Oct 26 03:07 AM

[Meltdownman:]

Check out Frontline's "The Warning": Greenspan, Rubin and Summers single handedly destroyed this economy by raping Brooksley Born in front of a whole nation:

www.pbs.org/wgbh/pages.../

The Meltdownman

Oct 26 06:56 AM

[Think-About-It:]

Nice opening chart!

Don't forget that when Japan's real estate and stock market bubble burst they had two things going for them that we (the U.S.) currently lack. 1) They were the worlds largest creditor nation whereas we are the worlds largest debtor nation. 2) During the years following the POP global GDP was expanding at a healthy clip so they were able to sell many goods to their major trading partners whereas that is not a given for the U.S. over the next 5+ years. These two factors helped them "manage" their unemployment rate and dissipate social unrest.

Commodity based assets are not the only hedge against the debasement of our currency. Foreign currencies, foreign stocks, precious metals and shorting bonds can also work.

Oct 29 02:57 AM