Greece and Portugal have now owned up to having outstanding debt that exceeds 100 percent of annual GDP. That is to say, they owe more than they make.
You can read all sorts of fancy-pants folderol to make you believe that “this is no problem.” But the simple truth is that nations are no different than individuals. As Dickens has the character, Wilkins Micawber (modeled on Dickens’ own father) in David Copperfield, state back in 1849: “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
If you spend more than you make, or you are worth less than you owe, you are, to use the proper technical macroeconomic term, “in deep doo-doo.”
So let’s take a look at what the drunken sailors known as The White House and Congress have conspired to do over the last many months: according to the Congressional Budget Office (the CBO), the current rate of deficit spending – no matter how noble the cause that is to be supported -- will drive the federal debt to almost $19 trillion by 2015 -- nearly doubling US debt since the TARP bailout was rolled out in just 2008. These esteemed gentlemen and ladies may believe the need for health care overhaul is so important that it trumps all rational use of money. (Of course, I refer to the same esteemed polecats who thought giving $700 billion to Wall Street as a small “thank you” for all those lovely campaign contributions was a pretty good idea, too.)
I say again: nations are no different than individuals. It doesn’t matter if I spend my money on whiskey and loose women or buy new tambourines for the Salvation Army, if I spend more than I make, I am going to debtors’ prison. I can protest all the way, “But it was for a worthy cause! They needed those tambourines!” but it won’t change the fact that I spent more than I had. Health care is no different for the nation, “global warming” is no different, organizing communities is no different, and coddling terrorists to make them feel all warm and cuddly is no different.
The only thing we need to remember is “Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.” So how we doin’? Well, gross federal debt is hovering right about 90 percent of GDP. But -- add in the $1.6 trillion debt liability of Fannie Mae (FNM) and Freddie Mac (FRE) which, since they aren’t wink-wink-nudge-nudge "technically" part of the federal government’s debt obligation – neither were AIG, Goldman Sachs (GS), and the rest of the rogue’s gallery that got taxpayer money -- and our national debt is already above 100% of GDP. Just like Greece. Just like Portugal.
Worse, because the Fed has kept the short end of the yield curve artificially low (90-day T-Bills are currently paying around 1/10th of 1%) we've mostly financed our spending with this short-term debt. Rather than lock in China and Japan and other Treasury-buyers with 20-year paper, we need to roll over our debt load every 90 days, every 180 days, every 9 moths, every 12 months. Has it occurred to any of our Fed governors, executive branch economists, or Congressmen that all it takes is for another nation to say “no thanks” to yet another offering of Treasuries paying 1/10th of 1% and we are thiiiiiis close to not being able to roll forward our massive debt?
The CBO further estimates that the 11% of the current budget (or nearly $400 billion and just 1% shy of the 12% that spun Greece out of control) we spend on interest might well increase by an order of magnitude of 2 to 3 times – in which case it would mean $1 trillion in interest payments. And you thought 18% on your credit card was bad…
If other nations say no thanks to our ridiculously profligate ways, who will finance our further gluttony? Why, the Federal Reserve, as the "lender of last resort," of course – meaning that the same people directing Treasury as to how much to print will be the ones buying the less and less valuable paper.
Of course, foreign and domestic investors aren’t all stupid (but at least one of us did elect the current crop of miscreants at the top.) Creating money out of thin air means it is worth less so we will expect and demand higher interest rates as the US dollar declines in value.
Inconceivable, you say? This is the US of A. America would never default on its debt. I agree. We won’t declare default. We’ll just do what nations that issue paper money have always done – create an “acceptable” level of inflation that will allow us to pay back our creditors – foreign and domestic – in dollars worth less than they were when the promise of repayment was issued.
I don’t like reciting these facts. I don’t like writing these truths. I want to hide my head in the sand as much as the next ostrich. But I do see an inevitable paying of the piper.
What to do? Well, you can buy gold, silver, oil, natural gas, coal, water and other stores of value / crisis hedges / essential and necessary resources. Rather than only provide a link here or there, I refer you to the body of previous articles I’ve titled with words like “resource,” “energy,” “bonds,” or “gold” for some ideas that have already worked out well and are likely to continue to do so in an inflationary environment.
One more thing you might want to do is take a hard look at an ETF like the ProShares UltraShort 20+ Year Treasury ETF (TBT) or the Direxion Daily 30 YR Treasury Bear 3X (TMV) (Yes, yes, recognizing the inherent volatility of leveraged and daily-settled ETFs, all well-detailed in previous articles and comments.) Sure, there will be temporary knee-jerk purchases of Treasuries, particularly by domestic buyers, which will cause them to rally, but in the intermediate and long-term, there is no question in my mind that yields on Treasuries will rise and the prices of Treasuries will fall. These ETFs provide a way to play that eventuality without dealing in the futures markets.
And of course there is one more thing we can do as citizens that trumps anything we might consider as investors. It’s easy to search online for the voting record of your elected politicians. I say, if they voted themselves a raise while you or your neighbor were losing your job, or voted to give bailout money to those who gave them the biggest campaign contributions, or allowed their staffers to exempt themselves from the health care bill they themselves wrote, or if they’ve been in office more terms than you have children, vote ‘em out.
We'll find out in November if Americans “get” what the Beltway and Wall Street don’t—nations cannot borrow, tax and spend their way to prosperity. We must all live within our means…
Author's Disclosure: We and / or clients for whom these investments are appropriate, are still long NRP,PVR, ATLIF.PK, NZT, FTE, TBT, TIP, NSL, PFL, TMV and VXX – all with trailing stops, and all while still maintaining a good cash cushion.
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