What I’m trying to say with all of this is that the US welfare state, or the notion of politicians dishing out handouts in exchange for votes, is soon coming to an end. Social security, Medicare and many other government spending programs will be cut in the coming years. Regardless of your feelings regarding these programs, they are not funded and with tax receipts falling (and will fall further as the Depression deepens) the US will simply not have the money to pay for these programs.
The political landscape in Europe dictates the fate of the Euro. And given the developments in Germany, we could see the beginning the end of the Euro's existence as early as September 2011.
One thing that NEEDS to be mentioned is that this time around, bad economic news is resulting in sell-offs. For the last two years, whenever bad data came out, stocks actually rallied on the belief that the Fed would have to provide more stimulus. So the fact that stocks are now tanking on bad economic data should be a major red flag that things have changed.
When the US does default is when the Second Round of the Great Crisis will hit. At that point the financial systems/ economies of entire countries, not just private banks, will collapse. What will follow will be the equivalent of 2008 on steroids featuring market crashes, debt defaults, civil unrest, food shortages, spikes in crime, etc. The purpose of the reports is to help you prepare for all of these items.
The US has entered a debt spiral: a situation in which more and more debt needs to be issued at the same time that lenders are unwilling to lend to the US for any lengthy period of time (greater than three years). On top of this, the US must to roll over trillions in old debt at the same time that it needs to issue an additional $150 billion in debt per month to finance its current deficit.
Round Two of the Crisis, the Sovereign Debt Round, began over Thanksgiving of 2009 when Dubai had a “virtual default,” asking for a six-month extension on $60 billion worth of its debt. The issue then spread to Greece over Christmas 2009. It will not end there. It's coming to the US's shores soon.
Aside from a brief dip at the beginning of July, the US monetary base continues its near vertical trajectory, which tells us that the Fed continues to print money despite QE 2 ending. It’s not much of a surprise, the Fed knows how to do one thing only: print money. However, the fact the Dollar is showing so poorly while Europe is taking a hit is a major warning that all is not well with the greenback.
Given the ridiculous number of rumors (and ridiculousness of some of the rumors) related to the US and EU debt talks that are circling the financial community, I thought it best that we confront the realities these two economies face.
The EU accounts for roughly $400 billion of China’s exports, making it China’s single largest export market. So if Europe collapses, China’s economy takes a BIG hit. Remember, China is a centrally controlled economy, NOT a dynamic open market economy. Put another way, the entire China “economic miracle” is based on the current system continuing to operate in some form (China can continue to export, rip off intellectual property that is developed elsewhere, throw its weight around, etc).
To say that systemic risk is a MAJOR problem for the EU would be the understatement of the year. For instance, if Portugal defaults, Spain’s banks will get taken to the cleaners. This in turn could trigger a HUGE systemic collapse as exposure to Spanish debt is equal to 4% or more of GDP for Switzerland, France, Germany, the UK, and the Netherlands.
Greece is NOT the big problem for the EU. However, worldwide exposure to Greek debt is in the ballpark of $277 billion. So a default there would result in significant market dislocations. Now consider the exposure to a BIG Problem such as Spanish debt. In this situation, Great Britain is on the hook for $51 billion. The US is on the hook for $187 billion. France is on the hook for $224 billion. And Germany is on the hook for a whopping $244 billion.
However, one thing is clear: we are fast approaching the REAL Crisis. And there’s no shortage of Black Swans to hit either. The Euro problem isn't going away. In fact, it's now spread from Greece to Italy and Portugal... the latter county now being officially rated as "junk. Meanwhile, China is experiencing a liquidity Crisis on par with the Lehman-collapse. In fact, a recent bond auction there failed to sell EVEN HALF of the bonds offered (there's not enough capital available).
The financial system is once again overleveraged. Meanwhile, the large banks continue to be insolvent due to their gargantuan derivative exposure. Put another way, the financial system is primed for another 2008 episode. The very same issues that caused 2008 remain in place. Leverage is far too high. And the unregulated derivatives market remains a multi-hundred trillion dollar problem.
Ultimately, all of these efforts will fail (see the Euro situation today). But this will only happen after the Fed has done any and every action it can to prop things up. This will include QE 3 and as many QE’s as the US Dollar will allow. So, QE 3 is coming. We might even see QE 4 before the system collapses. But the system WILL collapse. And when it does, it will be a 2008 type Crisis on steroids.
In simple terms, what I’m trying to say is that we are about to witness another “2008” only on a sovereign scale. The EU will be first, but China, Japan, and even the US will be defaulting in the future. The implications these actions have for asset classes will be HUGE as all assets move relative to sovereign bonds which used to be considered the primary low risk asset class in the world.
