If all this seems like a radical prediction, we need only look at the probabilities of the United States reversing its situation and funding its future liabilities.
As this US Debt clock demonstrates, the total US National debt has ballooned to almost US$13 trillion or US$117,000 debt for every tax payer. The US Government is collecting US$2.1 trillion in annual revenues, yet it now spend US$3.5 trillion annually. To put the final nail in the coffin, total future liabilities outstanding currently totals US$108 trillion (of this the Medicare liability is US$75 trillion). Some estimates are over US$120 trillion in liabilities. This amount with continue to compound, while the US has an aging demographic.
So for anyone who think the US can turn around this situation think again. Forget the spin around Obama, and his healthcare reform… his actions, and Presidents before him have made sure the US will end up defaulting on its debts and loose its luxury of being the world’s reserve currency (and buying the world’s resources for next to nothing – through printing endless US dollars).
If we had a more sound world monetary unit, the US would have went bankrupt many decades ago. In fact, the change of the monetary system in 1971, when President Nixon abandoned the Bretton Woods System, was essentially an admission that the US would default on its promise to convert its gold at US$35 ounce to other countries, if they so asked.
The current situation exists, as all the other major players still agree to participate in the current monetary system. China, Japan the UK and the many of the large oil countries continue to buy US t-notes (Government Debt). Indeed, the Federal Reserve, along with other central banks, US commercial banks, and major international banks continue to shuffle money around through over-the-counter derivatives to inflate and hide debts away from the scrutiny of the public. Sub-prime is at the very, very tip of a giant derivatives iceberg.
US Government Funding
* Nations buying US Federal Govt debt - see here. Australia has increased its US T-bill holdings by 77% in the last 12 months to US$14.4 billion. What are we thinking?
Pay the liabilities with money that doesn't exist
A historical timeline of US national debt can be seen here
* US Government interest on outstanding public debt
The US Government continues to pay hundreds of billions of dollars annually in interest on outstanding Government debt. In 2009, the US Government paid over US$383 billion in interest, about 8.5 per cent of total budget, and the fifth highest expenditure. Another way of looking at it, this is half the annual US defence budget! Remember, that the US is currently paying/using debt in a low interest environment, and that total debts and future interest payments will only compound at a faster rate in future years.
* Social Security
In March 2010, the New York Times reported that:
This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.Check the government numbers here.
Plugging the existing holes
US mortgages
Chart : another wave coming?
source: Financial Review 1 March 2010Fannie Mae and Freddie Mac
In February 2010, it was reported that Fannie Mae and Freddie Mac would require an additional $188 billion in government funds by October 2011, up from the $111 billion they have already drawn down. That does not count trillions in liabilities for the government-controlled firms.
For a background:
"Fannie Mae and Freddie Mac, which play a role in funding three-quarters of all U.S. residential mortgages, came under government control in September 2008 when they received a massive bailout that gave the government a 79.9 percent stake.The hypocrisy is that Freddie Mac made a full-year net loss of US$21.6 billion , whilst still paying dividend payments of US$4.1 billion to the US Treasury (on the senior preferred stock). Government's really know how to run businesses...
Late last year, the administration extended an unlimited credit line to the two companies through the end of 2012. Previously, the credit was capped at $400 billion."
AIG
AIG still overflowing with debts, with a 2009 full-year net loss of US$11 billion.
US Bank Failures
The number of official bank failures, as reported by FDIC reached 141 in 2009. Already, 57 have officially gone under so far in 2010 (refer Chart below).
Chart 1: Number of bank failures in the US over last decade
When banks, or any other large company fails, its assets are resold for x cents in the dollar - could it be Federal Reserve acquainted banks buying many of the assets once held by these failed banks? Was it also coincidence Bear Stearns was bought by a Fed bank (JP Morgan) for $2 p/share, when just 12 months earlier it was valued by the market at $150 p/share.Banking Bubble - the money can't hide in derivatives forever
As discussed back in 2008, the explosion in derivatives - complex financial products with underlying assets (ie. sub-prime CDOs), continues unabated.
Despite some debts coming to the forefront in recent years (US mortgages), the rate of bank lending (ultimately debt, and derivatives to cover up and pass on the debt) is growing at an unprecedented rate. The trendline in the chart below, was already growing quite strongly, but the last decade is clearly breathtaking (its not just the US banks, Chinese banks are part of the problem as well). A significant part of this lending spree went into housing bubbles around the world (some more notable than other)s. What markets could the banks inflate next? Commodities? (although China won't like this)
Chart 2: Banking Bubble led by the US Banks
source: ABC NewsSatyajit Das summed it up in The Monthy (April 2009):
The most important lesson of the financial crisis may be that the current economic order was built to fail, for the global economy used debt and financial engineering to enhance growth, requiring ever more stimulus to maintain performance. The spike in debt globally caused a spike in growth rates. As much as $5 of debt was required to create $1 of growth. Approximately half the recorded of growth in the US over recent years was driven by borrowing against the rising value of houses (that is, mortgage-equity withdrawals). As the level of debt in the global economy decreases, attainable growth levels also decline.Having another look at the largest 25 US Banks by derivatives exposure (to 31 Dec 2009), the total amounts of derivatives by US banks is still 3 to 4 times total world GDP (in US Dollars).
Chart 3:
source: US Department of TreasuryWhilst from first glance it appears the so-called GFC has done almost nothing to the amount of derivatives outstanding held by US banks. JP Morgan's position is down to $76 trillion (still well over the total amount of world-GDP which is around US$60 trillion). Another stand out, is that Goldman Sachs has been added to the list (after registering as a Commercial Bank from an Investment Bank). It's total credit exposure to capital is a crazy 766 per cent. Perhaps the S.E.C. (US Govt) should look under the bed a bit more... or is the recent fraud exercise a PR exercise to divert attention from other bank-debt-govt related problems?
All the above paints a storey that something is not right in the world's largest economy and that business-as-usual economics cannot continue indefinitely. The monetary system is broken, and we must prepare for a change of the guard (away from fiat currencies). Only a top-down approach starting with abolishing the federal reserve, its secrecy, and its illegal "behind-close-door" secret deals, than the US and the world can move forward with a more sound monetary system. In the meanwhile, the US dollar will continue to erode in purchasing power, along with all the world's fiats currency. Tangibles (gold, silver) are still in the early stages of a once-in-a-life-time super-boom.
Cheers
Scott
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