Are You Ready for the US Debt Spiral?

Phoenix Capital Research's picture


As the
mortgage foreclosure scandal spreads like wild-fire it is now clear that the
alleged housing boom which made us all rich was in fact backed by nothing but
loose monetary policy, systemic fraud, and rampant corruption.


Indeed, it
now appears that banks were not only signing foreclosure notices without
bothering to even verify the information ON the foreclosure (including WHO owns
the house), but that some institutions were actually COUNTERFEITING paperwork
if they couldn’t come up with legitimate documents.


While most
of the mainstream media is absolutely shocked that the housing bubble and bust
was/is rife with criminality (allegedly), I have to admit this is not a total
surprise for me. Consider this little tidbit from the Miami Herald from 2008:


Between 2000 and 2007, “regulators
allowed at least 10,529 people with
criminal records
to work in the mortgage profession. Of those, 4,065 cleared background checks after
committing crimes that state law specifically requires regulators to screen,
including fraud, bank robbery, racketeering and extortion.


The article
I’m quoting is from 2008. It starts with a story about an ex-convict who ADMITS he’d been convicted of cocaine
and was APPROVED.


Of course,
not ALL of the housing bubble involved coke dealers and ex-cons, but this
tidbit should have been a MAJOR red flag to everyone that the housing bust
(which was accelerating at that time) was going to involve a lot more than home
prices falling and money being lost.


I’ve said it
before and I’ll say it again… the US economy today is not about a recession or
a housing bust… it’s about an Empire in DECLINE.


We’ve got
all the tell-tale signs: we’re engaged in endless foreign military excursions
that bring nothing to the country, we’re depreciating our currency at a rapid
rate, we’re trashing the national balance sheet and falling further and further
into debt.


Indeed, the
US was already bordering on bankruptcy BEFORE the Financial Crisis began. And
SINCE the Crisis began the “powers that be” have done the following:


  • The Federal Reserve cuts interest
    rates from 5.25-0.25% (Sept ’07-today)
  • The Bear Stearns deal/ Fed buys $30
    billion in junk mortgages (March ’08)
  • The Fed opens various lending windows
    to investment banks (March ’08)
  • The SEC proposes banning short-selling
    on financial stocks (July ’08)
  • The Treasury buys Fannie/Freddie for
    $400 billion (Sept ’08)
  • The Fed takes over AIG for $85 billion
    (Sept ’08)
  • The Fed doles out $25 billion for the
    auto makers (Sept ’08)
  • The Feds’ $700 billion Troubled Assets
    Relief Program (TARP) (Oct ’08)
  • The Fed buys commercial paper
    (non-bank debt) from non-financials (Oct ’08)
  • The Fed offers $540 billion to
    backstop money market funds (Oct ’08)
  • The Fed backstops up to $280 billion
    of Citigroup’s liabilities (Oct ’08).
  • Another $40 billion to AIG (Nov ’08)
  • The Fed backstops up to $140 billion
    of Bank of America’s liabilities (Jan ’09)
  • Obama’s $787 Billion Stimulus (Jan
  • The Fed’s $300 billion Quantitative
    Easing Program (Mar ’09)
  • The Fed buying $1.25 trillion in
    agency mortgage backed securities (Mar ’09-’10)
  • The Fed buying $200 billion in agency
    debt (Mar ’09-’10)
  • Cash for Clunkers I & II
    (July-August ’09)
  • The Fed opening up currency swap lines
    to European Central Banks (April-May ’10)


All of these
sound pretty clever and complicated, but in reality they consist of nothing but
throwing VAST amounts of money at every issue that arises rather than allowing
the junk debt in the system to be cleaned out. Consequently, NOT ONE move
that’s been implemented has been positive for the US Dollar OR the US balance


At some
point, and I cannot tell you when, the US is going to find itself facing a
situation very similar to that of Greece. Indeed, if Greece’s numbers are
“Crisis Worthy” investors should consider that the US’s fiscal condition is in
fact AS BAD IF NOT WORSE than Greece’s.


The US is
expected to run a $1.7 trillion deficit in 2010. Assuming that the GDP numbers
are accurate (they’re not, but that’s an article for another time), the US
economy is in the ballpark of $14 trillion. This means we’re running a deficit
equal to 12.3% of GDP. That’s RIGHT next to Greece.


Then of
course, you’ve got our Debt-to-GDP ratio. If you ignore unfunded liabilities
like Social Security and Medicare, the US already has a Debt-to-GDP ratio of
98.1%. That’s only slightly off of
Greece’s Debt-to-GDP of 112%.


Throw in
Fannie and Freddie’s mortgage debts (Uncle Sam own $5 trillion of these now
too), and we’re already well over a Debt to GDP of 112% (actually it’s 130% or
so). And when you include Social Security and Medicare ($45 trillion) this puts
total US Debt-to-GDP at 421% ($59 trillion of Debt on a GDP of $14 trillion).


Those investors who believe the US is somehow immune to a
debt collapse are in for a VERY rude surprise.


Good Investing!

Graham Summers

PS. If
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