From Dr. Gary North (5/17/2011):
The worst crisis from the government's point of view is the national debt crisis. It leads to calls for reduced government spending. For this crisis, the government has this well-orchestrated response:And this from Porter Stansberry (I hate his (and so many other internet marketers') videos; they take way too long to "watch"/listen to them. So if you wait till the video starts, then hit the "Close Window" X button, you will be given the opportunity to stay on the page. Click "Cancel" and you will be able to read a full typescript of the video.) Here's just a small portion of Stansberry's longer presentation:
This week, the issue of the U.S. government's debt ceiling comes up for discussion in Congress. The Secretary of the Treasury has offered a dire forecast. There will be a double-dip recession unless Congress votes to raise the debt ceiling once again. Congress does this every year, but this year there is pressure from new House members not to raise the ceiling. Meanwhile, the government is in the middle of a $1.65 trillion on-budget deficit. Like a tornado, the deficit will hit the political will of Congress. There is no basement storm shelter. There is no safe room.
- An admission that it is real, but not imminent
- A promise to deal with it later
- A call to spend more now to spend less later
- Kabuki theater [According to Wikipedia: "classical Japanese dance-drama
. . .known for the stylization of its drama and for the elaborate make-up worn by some of its performers. . . .(The word) kabuki can be interpreted as "avant-garde" or "bizarre" theatre. The expression kabukimono (歌舞伎者) referred originally to those who were bizarrely dressed and swaggered on a street."]
Congress's will to resist will be flattened, as it is every year. Usually, this vote has been pro forma. The media may mention it, but not as a prime-time story. It is always assumed that Congress will rubber stamp the proposed increase, in order to avoid a partial shutdown of the government -- maybe 10% of operations. For Congress, this is regarded as a level-5 tornado, not a squall.
The debt limit will be reached this week. Geithner says that he can juggle accounts until August, but at that point, the government will have to default -- the big D.
Speaker of the House Boehner has said that there will be a hike in the debt ceiling, but it will be a very special kind of increase. He said on the CBS Sunday morning news show, Face the Nation, that "we're going to do it in a way that addresses America's long-term fiscal
challenges." . . .
In a previously recorded segment of the show, President Obama invoked what has become a familiar refrain: the recurrence of the 2008 crisis. If investors ever "thought the full faith and credit of the U.S. was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system. We could have a worse recession than we've already had."
Of course, neither Boehner nor Obama mentioned the possibility of cutting Federal spending in order to balance the budget this year and thereby avoid having to raise the debt ceiling ever again. Such a strategy is too radical. The proposed official solution is to raise the ceiling again, and to promise that this will not always be necessary, because economic growth will raise tax revenues One of These Days, Real Soon Now. The budget will be balanced. The recession will not arrive. They promise.
This year is different. The discussion is front-page, prime-time news. This is because a handful of first-term Congressional Republicans in the House are making noises about cutting spending in order to reduce the size of the increase. They don't have the votes, as we will see. These Congressmen say publicly that they see what is economically necessary, but economics has little influence in Congress. The majority of the members think they can kick the can down the road for another year. In 2012, they will all campaign on responsible spending. The operational definition of "responsible spending" never changes: "kick the can again."
DEFAULT IS COMING
In his interview in front of an audience, President Obama warned about the consequences of a default by the U.S. government. It could unravel the worldwide economic recovery. You can see the video here.
He is correct. If the Federal government ever stops paying interest on its debt, the repercussions in the financial markets would be severe. It would be worse than the crisis in the fall of 2008.
The problem we face is this: with every increase in the Federal debt ceiling, the likelihood of default increases. The politicians' solution to the threat of default is to delay the default.
The government is trapped. It really does face the prospects of default if the debt ceiling is not raised. The alternative is to cut spending drastically before August. But that would be a form of default. Certain groups that have been promised largesse from the Federal government would find that the promises were not binding.
The problem is now selective default. The Congress and the White House always agree to defer any form of default. This is why we can be sure that selective default is inevitable. The deficit numbers do not allow the government to escape the increase in the debt ceiling.
We know from decades of experience that selective defaults are not politically acceptable. So, the deficit keeps growing. The debt ceiling keeps getting raised. This is done in the name of default-avoidance.
The battle over the debt ceiling is a sham. If Congress cannot legislate spending cuts that will balance the budget, then there is no possibility that it will put a cap on total expenditures by means of a debt ceiling. There was no significant reduction in the deficit earlier this year. The deficit in fact rose compared to last year's forecast.
This is why the debate over the deficit is American kabuki theater. It is a way to score debate points for next year's elections. Candidates will be looking for published statements of incumbents' opinion on the debt ceiling. Everyone in Congress wants to position himself or herself as taking the responsible path to national prosperity.
The problem they face is this: to cut the deficit specifically is to alienate voting blocs that are dependent on transfer payments from the Federal government. They refuse to make specific cuts for this reason.
Each political party is more afraid of the alienation of specific voting blocs than it is with the general threat of the debt ceiling as a political issue. So, they do not specify what must be cut. Therefore, nothing will be cut.
An interviewer who wants to sink a candidate asks him to identify what programs he recommends cutting. The candidate mumbles.
Boehner said that everything should be on the table except raising taxes. This plays well to conservative voters. But where is this table? Whenever the debate over the annual budget gets laid on the table, the specific cuts are not made.
Boehner says we must now look at "the big picture." Indeed, we should. But Congress never does. Congressmen look at the small picture: the swing voters in their districts. These voters can usually make or break a re-election campaign. So, the Congressman seeks to retain the swing voters who elected him two years earlier while not losing his core constituency. He does not want voters to defect to his rival. So, he dares not propose specific cuts. Specific cuts alienate specific swing voters.
He said that Congress must not kick the can. But he announced that it must kick the can on the debt ceiling this time. When a politician says that Congress must not kick the can, but then says it must kick the can this time, so that it won't have to kick it next time, he is saying that Congress will kick the can.
as late as the 1970s, America was the world's largest creditor. But by the mid-1980s we'd become a debtor to the world. And since the late 1990s we've been the world's LARGEST debtor.And then there is Martin Weiss who asks--and answers in the assertive: Will the U.S. default? Is it really possible?
Today, our government owes more money to more people than anyone else in the world.
And that was before the financial crisis!
With all of these bad debts piling up, we've had to begin repaying our debts by printing trillions of new dollars. And now, finally, the impact of this is being felt in a big way.
As our creditors continue to figure out what's happening, we're going to have very, very big problems.
I believe our creditors (which includes foreign countries and other investors here and abroad) will either completely stop accepting dollars in repayment... or greatly discount the value of these new dollars. I'm sure you think that sounds crazy, but as I'll show you, it is already happening.
This will make our consumption-led way of life impossible to afford.
And I'm confident it will lead to an end of the U.S. dollar standard.
Keep in mind, the U.S. dollar has been the world's reserve currency for decades now... so most Americans don't have a clue about what the repercussions are of losing this status.
And maybe you think it could never happen... but the truth is, this is exactly what happens when countries get too far in debt or when they consume too much or produce too little.
In fact, the exact same thing happened to Great Britain in the 1970s.
Most people don't know this, but British Sterling was the reserve currency for most of the world for nearly 200 years... for most of the 18th and 19th centuries.
It continued to play this role until after World War II, when America was forced to prop up Britain's economy with foreign aid – remember the famous Marshall Plan, when we gave billions to help European countries rebuild?
Unfortunately though, Britain pursued a socialist national agenda. The government took over all of the major industries. Like Barack Obama, Britain's leaders wanted to "spread the wealth around." Pretty soon the country was flat broke.
The final straw for Britain came in 1967, when things got so bad the Labour Party (the socialists) decided to "devalue" the British currency by 14%, overnight. They believed this would make it easier for people to afford their debts.
In reality, what it did was make anyone holding British sterling 14% poorer, overnight, and it made everything in Britain, much, much more expensive in the coming years.
And for the country as a whole, it ushered in one of the worst decades in modern British history.
Most Americans don't know about Britain's "Winter of Discontent" in the late 1970s, when the government put a freeze on wages. There were continuous strikes in nearly every sector... grave diggers, trash collectors... even hospital workers. Things got so bad at one point that many hospitals were reduced to accepting emergency patients only.
In 1975, inflation in Britain skyrocketed 26.9%... in a single year!
The government also imposed what was known as the "Three Day Week" in 1974. In short, businesses were limited to using electricity for only three specified consecutive days' each week and they were prohibited from working longer hours on those days. Television companies were required to cease broadcasting at 10:30pm... to save electricity.
The extreme problems in the economy led to Britain being nicknamed, "the sick man of Europe."
Just how bad were things, exactly?
Well, here's a photo of the garbage that piled up because they didn't have enough money to pay trash collectors a fair wage...
And here's what John Blackburn, from Wetherby, recently told the BBC television channel about his experience during this period...
John Blackburn, from Wetherby said:
"I was a control engineer at Huddersfield Power Station at the time and part of my duty was to switch off the supply to various substations around the town, according to an official rota. On many an evening shift I would have to switch off the power to my own home before going back for a candle-lit supper!"
Imagine... Britain was a global superpower for 150 years. But when they started intentionally devaluing their currency, things went straight down hill.
Maybe you don't think something similar can happen here... but I'm telling you... it's already underway!
In fact, the exchange value of the U.S. dollar has fallen about 13% since June 2010. And its rate of decline is accelerating.
What happened to the British currency is now happening to the U.S. dollar.
As Barron's recently reported:"When the monetary history...is written decades from now...2010 could be a watershed marking the beginning of the end of the dollar-based, Western-centric monetary system."As the U.S. dollar continues to lose its position as the world's currency, gas, oil, and other commodities will continue to skyrocket. Almost EVERYTHING we consume will immediately get more expensive. All the clothing, furniture, and household goods we import from China.
All the food we get from Central and South America... all the electronics, televisions, computers, and cars we get from Asia and Europe. In fact, it's happening, right now before our eyes.
Everything is getting more expensive...
In fact, each week, The Wall Street Journal has a section called �Cash Prices.' It lists dozens of commodities, everything from wool, zinc, tin and pork... to gold, silver, platinum, and lead.
I recently checked these listings in the paper's March 1st, 2011 edition. And the numbers were mind-boggling...
In short, of the 88 prices quoted ... 85 items are more expensive today than they were just a year ago... many significantly so.
Oil is up more than 50% from a year ago. Silver is up more than 100%–so is cotton, and coffee. Tin is up 90%. Oats are up more than 70%. So is wheat. Butter is up more than 40%. So is sugar.
Again, of the 88 prices quoted, the only three physical commodities that are cheaper today than they were a year ago... natural gas, eggs, and chickens.
Everything is more expensive! In some cases... MUCH more expensive.
And yet the government says there is no inflation? How is that possible?
It's unbelievable to me that they think the American public is going to fall for this.
U.S. businesses have certainly caught on...
As Wesley Card, the head of a clothing company that includes brands like Dockers and Anne Klein, recently said: "It's really a no-choice situation. Prices have to come up."
And when you look back further than a year, the numbers are even more startling...
The chart below shows how much a few key commodities have skyrocketed in price, just since the beginning of 2009...
And the point here is simple: As we print more money, the price of the world's most essential commodities have soared. This is NOT a coincidence.
Around the world, as we print, prices soar... citizens protest... governments get overthrown. And it's only going to get worse...
Because we can NOT stop printing because we can't actually afford our existing debts. No one wants you to know this. No one.
That's why, despite the obvious inflation going on all around the world, the Fed continues to say there's no inflation at all.
And that's the scary part, to me. Just like in a Banana Republic, the government is radically devaluing the dollar and totally lying to everyone about what is really happening.
Whether you realize it or not, there is already a "run" on the dollar. Many of our creditors, like the Chinese, are getting out of the dollar as fast as they can via strategic commodities, like copper. That's partly why commodity prices are soaring.
Unfortunately, skyrocketing commodity prices are just the beginning.
There are other disastrous consequences to the U.S. dollar losing status as the world's currency...
For example, there would be much less demand for U.S. dollars around the globe, so interest rates will skyrocket. Already, just look how quickly rates have moved up in recent months...
Instead of getting a mortgage at today's low rates of 5%, it may soon cost you 8% or even 10% or 15%.
Imagine what that would do to housing prices!
Stock prices will likely plummet by at least 40% in a matter of weeks as a result of this event in the currency markets.
It will cost every American business A LOT more money for supplies and materials. No one will be able to get a loan... and no bank will want to make loans.
In short, when the U.S. dollar loses its spot as the world's 'reserve currency,' it will cause a brutal downturn in the economy, which I expect will be about 10-times worse than the mortgage crisis of 2008.
As Barron's recently reported:
"The demand for dollars from the rest of the world has been of inestimable benefit to the U.S. economy. It quite simply allows Americans to consume more than they produce and save less than they invest; in other words, to live beyond our means."
You see, what will also happen as a result of this currency crisis, and the end of the U.S. dollar as the world's reserve currency, will be massive inflation, the likes of which we have never seen before.
When everyone is trying to get rid of their dollars, the government is printing more and more to pay debts, and no one wants to own them, the crisis will reach epic proportions.
Just look, for example, at what happened to one European country that faced this type of crisis in the 1990s...
This is what happens during a major hyperinflation in the real world.
The World's Most
Expensive Loaf of Bread
In the early 1990s, the national government of one European nation had spent nearly all its savings. So what did they do next? Simple... they began to steal the savings of private citizens by limiting people's access to their money in government-controlled banks.
And of course, to finance the daily operations of maintaining their basic infrastructure, they started printing money, big time. Even so, the country's basic infrastructure began to fall apart. There were potholes in the street, broken water pipes... elevators that never got repaired... and entire construction projects that simply shut down, before being completed.
The unemployment rate was more than 30%... and the government just kept printing money.
As San Jose State University Economics Professor Dr. Thayer Watkins, an expert on countries that try to inflate their way out of big debts, wrote on this particular disaster:
"The government tried to counter the inflation by imposing price controls. But when inflation continued, the government price controls made the price producers were getting so ridiculously low that they simply stopped producing. bakers stopped making bread... slaughterhouses refused to sell meat to the stores... other stores closed down"
So what did the government do next to try to curb inflation?
Well, one bright idea they had was to force stores to fill out government documents every time they increased prices. They thought that this would slow down price increases, because the paperwork would take so much time!
But like many government plans, this one had terrible, unintended consequences.
Since stores had to dedicate an employee to do nothing but register this paperwork, and since the process took so long, stores began to raise prices on basic goods at even higher rates, so that they didn't have to come back and file more paperwork!
Incredible, isn't it?
So next the government created a new currency... which basically removed six zeroes from the old one. So 100,000,000 old units were soon worth 100 new units. Of course, this didn't work either... it never does.
Between October of 1993 and January 1995, prices increase by, get this: 5 quadrillion percent. That's...
In other words, a loaf of bread that cost $1 in 1993, suddenly cost
Yes, that's $50 TRILLION.
I know, it's laughable... but I can guarantee that the people of this once proud European country weren't laughing one bit, especially those living on a fixed income.
[John's comment: "1993 to 1995"? I hadn't heard of this hyperinflation. Maybe Stansberry got his dates mixed up? He's pulling our leg? What's he talking about? . . . I did a Google search on inflation five quadrillion percent.
Oh! A paper by Dr. Watkins popped right up! --Yugoslavia. "The worst episode of hyperinflation in world history," says Dr. Watkins.
So now I can add Yugoslavia to my list of country's of whose hyperinflation I'm aware: Germany, Argentina, Chile, Vietnam, and so many others.
And we in the U.S. think we're going to escape?]
Of course, at this point, the country completely fell apart. As Dr. Thayer Watkins wrote:
"The social structure began to collapse. Thieves robbed hospitals and clinics of scarce pharmaceuticals and then sold them in front of the same places they robbed. The railway workers went on strike and closed down the country's rail system."
At this point, businesses and citizens across the country basically refused to take the local currency.
Instead, everyone started dealing in German Marks. Keep in mind, the daily rate of inflation was nearly 100%.
Can you imagine the panic in a society when the price of just about everything doubles... every single day? It was absolute pandemonium, and the economy basically came to a grinding halt. It was like living in a war zone. Truckers stopped delivering goods. Stores, restaurants, and gas stations all shut down.
In another ridiculous government move, the government actually made it illegal to NOT accept a personal check.
Imagine... you could write a check... and in the several days that it typically takes for a check to clear, inflation would wipe out almost all of the cost of covering your check.
Of course, as is typical, the government took none of the blame. As Dr. Thayer Watkins reported, the government's official position was that the hyperinflation occurred "because of the unjustly implemented sanctions against the people and state."
Again... I know what you are thinking... "just because it happened in Europe doesn't it mean it can happen here, right"?
Well guess what...
The same thing that happened in this European country – Yugoslavia – also just happened in Iceland and Greece, but on a less dramatic
scale. . . .
It's not only possible, it is already happening. They're just hiding it. Kind of.
Take a look.
Okay. So we've got all these screaming "the sky is falling" disaster pundits. What is a nice, sane, reasonable person supposed to do?
I'd say, first of all, you want to get educated about this stuff.
Read Weiss' article. He makes some solid suggestions.
Read the rest of Stansberry's lengthy article. He concludes with several practical suggestions, including an appeal to subscribe to one of his newsletters.
Maybe you would like to read The Hyperinflation Survival Guide published at the behest of Harry E Figgie, Jr, the CEO of Figgie International, Inc., back in the late '80s. --I wrote about it back in November.
Come to think about it, maybe you'd even like to read some of my past posts about hyperinflation here on my John's Corner blog.