Weekly Recap: Is the U.S. Going Bankrupt?

Stocks at a Top, Dollar at a Bottom

Despite several attempts, the S&P 500 failed to close above the all-important 1,100 level. It has since fallen back to the 1,090 pivot. This does not bode well for stocks and suggests that the bounce started seven trading days ago is likely over.

We are witnessing a flight to safety occurring in the major indexes as evinced by the Dow outperforming the Russell 2000, the S&P 100 outperforming the S&P 500, the Nasdaq 100 outperforming the general Nasdaq, etc. In simple terms, money is shifting away from smaller more “risky” tranches into the larger, bluechip companies.

Similarly, the US Dollar looks to have put in a double bottom. This is extremely stock and commodity negative (it could also hammer gold). If we see the Dollar rally above its recent high of 76.4 then we may very well see a test of the 50-day moving average (blue line). Any break above this level should trigger a full-scale collapse in stocks and commodities (oil appears to already be discounting this in some ways).

Spending Up, Sales Down. The US is Bankrupt

As I’ve stated in previous essays, the US is effectively bankrupt. Spending is soaring at the very same time revenues (tax receipts) are in a free-fall. I’ll outline some simple math proving it.

Consider that the US economy is officially listed as being valued at $14 trillion. However, we know that this recession has dented it by at least 10%, so that puts the real US economy somewhere in the ballpark of $11 trillion.

Now, total public and private debt outstanding currently stands at $57 trillion. We’ve also got another $70 trillion in unfunded liabilities standing in the wings as a result of Social Security and Medicare. However, for simplicity’s sake, we’ll ignore this $70 trillion and focus on the debt we have to service right now.

With interest rates standing at 0.25%, the annual interest payments for our debt are around $142 billion which is roughly 1% of GDP.

So, what happens if interest rates go to 1%?

With interest rates at 1%, US debt payments jump to $570 billion, an amount equal to 5% of US GDP. At 2% interest we’re up to $1.4 trillion (10% of GDP), and so on and so forth.

And that does not count return of principal, those are merely the interest payments.

Now, the US, like most governments, funds payments via taxes. There’s one small problem there though -- tax receipts are plummeting (as unemployment soars) at the exact same time that the government is engaged in profligate spending. In October, the Government spent $312 billion and took in $135 billion in taxes, creating a $176 billion deficit.

This is the single worst reading for the month of October in history.

In simple terms, the US is effectively bankrupt and getting more bankrupt by the day. There is no way we can service our debts at current levels, and the levels are only getting worse. How this will end (default, inflation, etc) I cannot tell you, but it will end badly. I would look into buying gold bullion on any significant pullbacks in the precious metal.

Speaking of which…

Gold Due for a Correction

As I stated in Wednesday’s essay, I believe Gold has come too far too fast. In particular, there have a been several non-confirmations to Gold’s rise: the precious metals, Gold miners, etc.

As you can see, Gold is extremely extended above its 50- and 200-day moving averages. If the Dollar is indeed putting in a double bottom, we should see a serious correction here back down to $1,050 or even $1,000 per ounce. At that point I would definitely consider increasing exposure to the precious metal.

The world’s banks are all engaging in the same mindless stimulus and money printing. This is extremely Gold positive. And we are nowhere near the real mania stage for the precious metal. During the last Gold bull market (the ‘70s), the final leg of the bull market saw a 750% rise in the price of Gold. At that point we’re talking about Gold in the $5,000 per ounce range.

Bear in mind, I’m not talking about Gold’s near-term performance future. The final bull leg in the ‘70s took four years to complete. If this current bull market continues to repeat the trends we saw in the ‘70s (as it has almost to perfection) then there’s considerable time before Gold peaks.

Comments

[Rokjok777:]

I have really enjoyed your comments here on SA but it seems recently that you are feeling quite dark...almost biblical. Surely things cannot look that bad, cheer up my friend. As my late mother used to say "it's only money..."


On Nov 13 11:44 AM User 353732 wrote:

> The interesting question is not whether the US is bankrupt; it is.
> That is what negative net worth means.
>
> The 3 interesting, presently, unanswerable questions are:
>
> 1. What mechanism or mechanisms will the US Regime use to manifest
> the default?
> 2.How will the world and what is left of the American Middle Class
> respond?
> 3. Post response, will the USA as we know it exist as a legal, sovereign
> entity?
>
> No flourish of trumpets will announce the defaults and its cascading
> consequences. The night before, it will be business as usual for
> the US Regime; the next dawn will be a dawn like no other in American
> history.
>
> The night is far spent. There is a last day for economic wickedness
> and financial depravity. Reality and truth do prevail and will prevail.

Nov 13 02:49 PM

[Davewmart:]

It's understandable that US commentators should focus on the US, particularly as it forms such a major part of the financial world.
Any collapse is likely to start elsewhere, however, which will influence the pattern and perhaps the time scale.
The UK is a very good candidate to succumb before the US, as it has all of it's woes and then some, and few of it's assetts.
Indebtedness is much greater, backed by dodgy bank assets, with a further layer of murk from derivatives.
There are also a number of smaller countries that are likely to bite the dust if the downturn worsens.

Nov 13 05:24 PM

[dingding:]

The US debt situation is analogous to an ARM mortgage. The day of reckoning comes when the interest rate resets.

Nov 13 06:18 PM

[untrusting ...:]

Would not be so sure that you can state the US is bankrupt meaning that it's net worth is negative.

For example,
1) the US government has hundreds of millions of acres of federal land, mineral rights, grazing rights, water rights, etc. that they could monetize if they choose to.
2) the US government has hugh offshore ocean rights that they could exploit and monetize if they choose to do so.
3) the US government has hugh intangible revenue sources they could monetize such as: airwave rights, patent registration, license rights, drilling rights, etc.

Further, the US government could substantially raise fees to cover the actual cost of services on a hugh number of services such as: stock market transaction costs, passports, agriculture regulatory costs, environmental regulatory costs, drug regulation costs, airport or port operations, etc. No reason that general taxes as opposed to user fees should have to pay for any government services.

The US government and even state and local governments could fairly easily move to put their fiscal houses in order. It's not really rocket science. They just don't have the political will to do it. They are too conficted in supporting the corrupted system that exists now as it hughly benefits the politicans, lobbyists, regulators, and large public company oligarchs.

Thye real question is will they? Probably not until they literally have no other alternative and the current bunch of corrupt Democrats and Republicans is literally tossed out in mass. Maybe if a new political party somehow evolves that is committed to wholesale reform and fiscal responsibility.


On Nov 13 11:44 AM User 353732 wrote:

> The interesting question is not whether the US is bankrupt; it is.
> That is what negative net worth means.
>
> The 3 interesting, presently, unanswerable questions are:
>
> 1. What mechanism or mechanisms will the US Regime use to manifest
> the default?
> 2.How will the world and what is left of the American Middle Class
> respond?
> 3. Post response, will the USA as we know it exist as a legal, sovereign
> entity?
>
> No flourish of trumpets will announce the defaults and its cascading
> consequences. The night before, it will be business as usual for
> the US Regime; the next dawn will be a dawn like no other in American
> history.
>
> The night is far spent. There is a last day for economic wickedness
> and financial depravity. Reality and truth do prevail and will prevail.

Nov 13 09:43 PM

[raising4dau...:]

There were a lot of other red flags during the campaign that BHO doesn't have a clue. He's a thinly-veneered, no talent affirmative-action hire. Hopefully we'll learn from this experiment.

Full disclosure: Not a Beck/Rush follower. W was the worst or 2nd worst president in my lifetime, but BHO appears to be a contender.


On Nov 13 02:42 PM Uffda wrote:


> An economic jobs conference is only a flag that he has no clue what
> to do. Scary.

Nov 13 10:05 PM

[mannettino:]

Matt,
There's a pretty big flaw in your analysis here. It has to do with the long/short weighting of the debt financing being done by the US. Because of the ultra low rates on the short end, they have (very dangerously) shifted the weighting towards that end because of the interest rate effect noted in the original article here. So, now we are REALLY exposed to any relatively major geopolitical event that would effect the short end of the interest curve. This is particularly true due to the levering up that's taken place via the carry trade being conducted (also leveraging the "cheap" money on the short end). So, anything that causes short term rates to increase is going to push us off the cliff.
Regarding the spread between internal recycling of cash vs. foreign infusions via the treasury auctions, the easiest way to track that is via the statistic known as "TIC flows". It gets published monthly (I think). Suffice to say, it's moving in the wrong direction (e.g. less and less foreign central bank financing is coming in, and that which does come in is also going to the short end of the maturity curve). Net net, one cataclysmic disaster waiting to happen, and all the SOB NoBama cheerleaders on CNBC are aware of it but surpressing the reporting on it due to pressure "from above". God help us.


On Nov 13 02:39 PM MattZN wrote:

> Well, I suppose its fun to imagine the U.S. government going bankrupt
> but the only part of the above analysis that actually makes any sense
> is the part describing the double-bottom in the dollar, since that
> could very well be driven by a reversal of the carry trade.
>
> Things like comparing large-cap against small-cap are meaningless
> in the face of a large dollar move simply by virtue of the massive
> difference in international exposure large-caps have vs small-caps.
>
>
> Debt servicing loads are not really related to current interest rates,
> other then the debtor potentially being able to refinance the debt
> at a lower rate. Credit card debt and home equity lines of credit
> are the primary short term debt instruments (neither of which is
> even remotely close to 0.25%. Try 7%+). Everything else will be long-term
> mortgages (~6%), long-term municipal debt (~4%), and mid and long-term
> government debt (3-6% I think). Just off the top of my head, I'm
> sure someone can pull the real numbers out.
>
> For U.S. government debt it is easiest to view it by splitting it
> into two pieces: The piece held by U.S. citizens and the piece held
> by foreign countries and non-U.S. citizens. The piece held by U.S.
> citizens is just a transfer of wealth inside our boundaries which
> gets recycled back into the economy anyway. The piece held outside
> the U.S. is the bit that can really impact the nation's wealth. I
> don't have the breakdown handy.
>
> Municipal debt is almost universally held within our borders so it
> just cycles within the economy.
>
> A more telling issue is how the debt effects the middle class. As
> a country we do not want to wind up the situation where 99% of the
> wealth is held by 1% of the population and the middle class evaporates.
> We lost a lot of ground during the bush years (and I'm speaking as
> a person who benefited greatly tax-wise during those years when at
> the same time my brother paid the government gobs of money in taxes
> despite making 1/10 what I make). The rich got far, far richer during
> those years. Our strength as a country is our ability to support
> a large middle class so that is what I look at when I'm thinking
> about the health (or lack of) of the country.
>
> -Matt

Nov 13 11:16 PM

[NOCSM:]

We must keep in mind that nobody (i.e., creditors) wants to see the United States of America declare bankruptcy because of our reliable interest payments...and Goldman Sachs (j/k). I think a more important issue is how a Japan bankruptcy would affect the USA.

If Japan defaults, then their creditors can come knocking on the United States of America's door asking for that trillion or so in dollars Japan has lent to us over the years. How will that affect the USA? Will we strengthen the US dollar before a Japanese default occurs? Print a trillion dollars? Or just not pay any of it back at all?

Nov 13 11:28 PM

[DONE_SONZ:]

Gold needs a correction alright.To the upside.

Nov 14 08:19 AM

[surgcare:]

With the USA going (or is ) broke , why would anyone "flee " to the dollar as a measure of safety ? and why aren't T-Bills going up as another measure of flight to saftey .

Nov 14 09:40 AM

[Long Silver...:]

If the Treasury is shifting to short-dated maturities to carry a growing debt load, and if the Fed is therefore even more reluctant to raise short-term interest rates, then if velocity starts taking off, what's left to stop the runaway train of inflation? How can reverse repos be undertaken in sufficient quantity to offset Treasury needs to borrow for both principal and interest payments? What tools would be left?

Nov 14 10:23 AM

[Dave Wrixon:]

You could have made the same arguments relating to Africa at any point in the last 50 years.


On Nov 13 09:43 PM untrusting investor wrote:

> Would not be so sure that you can state the US is bankrupt meaning
> that it's net worth is negative.
>
> For example,
> 1) the US government has hundreds of millions of acres of federal
> land, mineral rights, grazing rights, water rights, etc. that they
> could monetize if they choose to.
> 2) the US government has hugh offshore ocean rights that they could
> exploit and monetize if they choose to do so.
> 3) the US government has hugh intangible revenue sources they could
> monetize such as: airwave rights, patent registration, license rights,
> drilling rights, etc.
>
> Further, the US government could substantially raise fees to cover
> the actual cost of services on a hugh number of services such as:
> stock market transaction costs, passports, agriculture regulatory
> costs, environmental regulatory costs, drug regulation costs, airport
> or port operations, etc. No reason that general taxes as opposed
> to user fees should have to pay for any government services.
>
> The US government and even state and local governments could fairly
> easily move to put their fiscal houses in order. It's not really
> rocket science. They just don't have the political will to do it.
> They are too conficted in supporting the corrupted system that exists
> now as it hughly benefits the politicans, lobbyists, regulators,
> and large public company oligarchs.
>
> Thye real question is will they? Probably not until they literally
> have no other alternative and the current bunch of corrupt Democrats
> and Republicans is literally tossed out in mass. Maybe if a new political
> party somehow evolves that is committed to wholesale reform and fiscal
> responsibility.

Nov 14 10:38 AM

[Nextel Acce...:]

Bankrupt? come on. Raise our GDP and keep debt flat and we will be fine over time.

Nov 14 11:11 AM

[User 498535:]

Where are you getting your debt numbers???

Check the Treasury website and you will see the debt is only $12 trillion and of that $4.4 trillion is intragovernmental lending on which no interest need be paid (it is merely shifting money from one pocket to the other). The real debt that is of concern is the remaining $7.6 trillion held by the public. YOUR MATH IS OFF BY A FACTOR OF TEN.

Your $57 trillion figure is roughly equal to some economists' estimated of the total unfunded liabilities of the country, but we do not pay interest on that. Those are potential future liabilities, not existing ones.

And why don't you look at the ACTUAL spending of the US government to see what was really paid in interest instead of making up numbers? Interest on the debt in FY2008 was $451 billion. In FY2009 it was $383 billion. (treasury.gov/press/rel...) FY10 estimates are closer to FY08 actuals.

Do some basic research before you pass yourself off as an expert!!

Nov 14 11:36 AM

[The Geoffster:]

It's the unfunded liabilities that will get us.
www.usdebtclock.org/


On Nov 14 11:36 AM User 498535 wrote:

> Where are you getting your debt numbers???
>
> Check the Treasury website and you will see the debt is only $12
> trillion and of that $4.4 trillion is intragovernmental lending on
> which no interest need be paid (it is merely shifting money from
> one pocket to the other). The real debt that is of concern is the
> remaining $7.6 trillion held by the public. YOUR MATH IS OFF BY A
> FACTOR OF TEN.
>
> Your $57 trillion figure is roughly equal to some economists' estimated
> of the total unfunded liabilities of the country, but we do not pay
> interest on that. Those are potential future liabilities, not existing
> ones.
>
> And why don't you look at the ACTUAL spending of the US government
> to see what was really paid in interest instead of making up numbers?
> Interest on the debt in FY2008 was $451 billion. In FY2009 it was
> $383 billion. (treasury.gov/press/rel...) FY10
> estimates are closer to FY08 actuals.
>
> Do some basic research before you pass yourself off as an expert!!

Nov 14 09:45 PM

[Gary A:]

Besides George Bush being a traitor in so many ways, I agree with you that the Fed must keep interest rates low. Right now they are doing so by monetizing stuff, like MBS. That cannot continue, and they will have to actually defend the dollar and unwind something, like for example the budget deficits. So here we are with a Keynesian need to spend to avoid deflation, but we are too broke to do so!! Ain't that a hoot?


On Nov 13 11:16 PM mannettino wrote:

> Matt,
> There's a pretty big flaw in your analysis here. It has to do with
> the long/short weighting of the debt financing being done by the
> US. Because of the ultra low rates on the short end, they have (very
> dangerously) shifted the weighting towards that end because of the
> interest rate effect noted in the original article here. So, now
> we are REALLY exposed to any relatively major geopolitical event
> that would effect the short end of the interest curve. This is particularly
> true due to the levering up that's taken place via the carry trade
> being conducted (also leveraging the "cheap" money on the short end).
> So, anything that causes short term rates to increase is going to
> push us off the cliff.
> Regarding the spread between internal recycling of cash vs. foreign
> infusions via the treasury auctions, the easiest way to track that
> is via the statistic known as "TIC flows". It gets published monthly
> (I think). Suffice to say, it's moving in the wrong direction (e.g.
> less and less foreign central bank financing is coming in, and that
> which does come in is also going to the short end of the maturity
> curve). Net net, one cataclysmic disaster waiting to happen, and
> all the SOB NoBama cheerleaders on CNBC are aware of it but surpressing
> the reporting on it due to pressure "from above". God help us.<br/>

Nov 14 10:27 PM

[realold:]

I agree except that the Obamanation is not a contender, it is the champion. Current events are the worse to ever effect the U.S. Are they reversible? I sure hope so.

Before the election, I heard a replay of the Obama radio interview from his early junior senator days. I had hoped that it would be played many times before the election, but it was not. He really thinks that the Constitution is wrong and needs to be changed to give an advantage and special consideration to "diadvantaged" people.

My Dad picked cotton at age 8 and ate horse feed many times for dinner. He and I did just fine without the government's help. Obama thinks otherwise and is ruining this country in order to promote the poor toward middle class benefits by "giving" them what my family worked so hard to achieve. The result will be the end of the middle class as it is slammed into poverty.

The purpose of Obamacare is to accelerate this by packing medical schools with the underqualified poor (read about special grants and dispensation for minorities and underpriviled in medical school entrance in the House Healthcare bill) and to chase the current medical establishment to greener fields ( I saw my liberal doctor this week and these are his words). This will destroy quality care in the U.S.

Point is, the U.S. economy and dollar are both doomed on the current path. I will be increasing commodity and specific gold miner stock ownership on any pullbacks. China, India, Canada, and Brazil will rule the world. And the citizens voted for this!

I am so sad to see this in my lifetime and fear deeply for my grandchildren. Hope you young people find your way out.


On Nov 13 10:05 PM raising4daughters wrote:

> There were a lot of other red flags during the campaign that BHO
> doesn't have a clue. He's a thinly-veneered, no talent affirmative-action
> hire. Hopefully we'll learn from this experiment.
>
> Full disclosure: Not a Beck/Rush follower. W was the worst or 2nd
> worst president in my lifetime, but BHO appears to be a contender.
>
>

Nov 15 02:18 AM

[Gary A:]

Obama is an extension of the banker cartel, but Bush was a member as well. And Bush started wars of greed. For example. The war in Afghanistan was hatched as a response to the Taliban going to Texas in 1997 and refusing to build the pipeline to daddy Bush and Helliburton investments in the Caspian Sea. Afghanistan was never a response to 9/11. Some say it was a beneficiary of 9/11. I believe the rejection of the pipeline allowed a false flag against the United States. I don't know who started 9/11, but I know Bush allowed it and was an accessory to it.


On Nov 15 02:18 AM realold wrote:

> I agree except that the Obamanation is not a contender, it is the
> champion. Current events are the worse to ever effect the U.S.
> Are they reversible? I sure hope so.
>
> Before the election, I heard a replay of the Obama radio interview
> from his early junior senator days. I had hoped that it would be
> played many times before the election, but it was not. He really
> thinks that the Constitution is wrong and needs to be changed to
> give an advantage and special consideration to "diadvantaged" people.
>
>
> My Dad picked cotton at age 8 and ate horse feed many times for dinner.
> He and I did just fine without the government's help. Obama thinks
> otherwise and is ruining this country in order to promote the poor
> toward middle class benefits by "giving" them what my family worked
> so hard to achieve. The result will be the end of the middle class
> as it is slammed into poverty.
>
> The purpose of Obamacare is to accelerate this by packing medical
> schools with the underqualified poor (read about special grants and
> dispensation for minorities and underpriviled in medical school entrance
> in the House Healthcare bill) and to chase the current medical establishment
> to greener fields ( I saw my liberal doctor this week and these are
> his words). This will destroy quality care in the U.S.
>
> Point is, the U.S. economy and dollar are both doomed on the current
> path. I will be increasing commodity and specific gold miner stock
> ownership on any pullbacks. China, India, Canada, and Brazil will
> rule the world. And the citizens voted for this!
>
> I am so sad to see this in my lifetime and fear deeply for my grandchildren.
> Hope you young people find your way out.

Nov 15 02:48 AM

[SAUBW:]

While I don't disagree with the conclusions of the article overall, I am puzzled as to the statement that a 14 trillion dollar economy with a 10% hit is approximately an 11 trillion dollar economy. The 11 trillion figure used seems to be closer to the assumption of a 21% hit rather than 10%. Am I missing something here?

Nov 16 10:26 AM

[David Braun...:]

GOLD BUGS TAKE NOTICE!! Gold like most other commodities and most stock markets worldwide are in a bubble. I do not argue that the world's economy is fragile. But, if you believe that gold will help you in a crisis, you do not want to hold Gold equity shares or ETF's or a so-called "Gold Account." If you own paper that entitles you to some kind of ownership in gold you've got to know that you can really get to the gold. In my opinion if all the gold were demanded by ETF's and "Gold Accounts" there would not be enough physical gold to meet the order. Gold paper is just another fiat currency. GOLD BUGS BEWARE. Only the real metal is worth the price of gold.

Nov 16 11:02 AM

[David Braun...:]

GOLD BUGS TAKE NOTICE!! Gold like most other commodities and most stock markets worldwide are in a bubble. I do not argue that the world's economy is fragile. But, if you believe that gold will help you in a crisis, you do not want to hold Gold equity shares or ETF's or a so-called "Gold Account." If you own paper that entitles you to some kind of ownership in gold you've got to know that you can really get to the gold. In my opinion if all the gold were demanded by ETF's and "Gold Accounts" there would not be enough physical gold to meet the order. Gold paper is just another fiat currency. GOLD BUGS BEWARE. Only the real metal is worth the price of gold.

Nov 16 11:02 AM