Thursday, January 16, 2014

The Very Bad News

The Very Bad News...
Looking ahead, my friends, I have some very bad news...

The situation in the U.S. is worse than you can even imagine. A crisis is certain. Here's why:
By 2025, two things alone will eat up ALL government revenues: entitlements and the interest on the national debt.

This is not my estimate... It comes from the government – the Congressional Budget Office – based on what it sees as the likely scenario. And the crisis in these two things alone escalates indefinitely.

Again, this includes no actual "governing" expenses – no bills, no lawmaking, no military, no repairs to roads and bridges, no education... It includes nothing. Add those in, and the U.S. quickly looks worse than the banana republics that have defaulted on debts in the past.

But you already know we have a government spending problem... So how do we get out of it?
When you break it down, there are only three ways out of this situation...
  • Dramatically reduce government spending.
  • Dramatically increase taxes.
  • Inflation.
Think about these for a minute...

Do you really believe our government will dramatically reduce spending? What about dramatically increase taxes? The brutal fact is, you can't raise taxes enough to offset the upward sloping curve you see in the chart... Besides, voters won't go for higher taxes anyway.

So that leaves inflation... It's the only possible way out politically. The U.S. won't default on its debts. It will "inflate" them away through money printing.

Americans are in denial... They don't believe this will happen. But the other two alternatives either won't happen or can't change enough to make a difference.

In the book This Time is Different: Eight Centuries of Financial Folly, authors Carmen Reinhart and Kenneth Rogoff study how governments end up in this mess over and over again. And every time, they think their situation will be different. They call it the "'This Time is Different' syndrome." The book explains it well...
[It's] the belief that financial crises are things that happen to other people, in other countries, at other times. Crises do not happen to us, here and now. We are doing things better. We are smarter. We have learned from past mistakes.
Unfortunately, a highly-leveraged economy can be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provoke a crisis of confidence that pushes it off the cliff.
The U.S. is on that cliff now. It's simply waiting for this "crisis of confidence" to happen – it's waiting for the day when Americans realize the jig is up...
When will that day come? After studying eight centuries of government crises, Reinhart and Rogoff can only say:
Economists do not have a terribly good idea of what kinds of events shift confidence... [In short,] in the history of financial crises, when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess.
A U.S. crisis appears inevitable. We can't know when it'll happen. My best estimate is "not today" – but more likely, sometime after the year 2015...

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