Insolvent and Going Deeper

Wednesday, April 13, 2011, 5:45 PM

The US budget process is entirely out of control. By extension, its fiscal future is rather bleak.

All one has to do is back up two steps, entirely ignoring the meaningless budget scuffles currently ongoing in DC, to see that the federal government's fiscal situation is in complete shambles. In fact, as things currently stand in terms of spending and revenues, the US government is insolvent - its liabilities vastly exceed its assets on a net-present-value basis.

Yes, Obama has just laid out a plan that calls for cutting some $4 trillion of new, incremental deficit additions over the next 12 years, but this merely obscures the fact that the deficit will still grow by a rather hefty amount nonetheless. Plans from both sides of the aisle call for adding more debt but at a slower pace. True, that's progress of a sort, but not the type of progress you want to bring home to meet your mother.

For anybody who is even a casual student of history or has paid the slightest bit of attention to what has transpired for Greece, Ireland, Portugal, and other countries with an unrestrained tendency to spend more than they have, it is clear what the progression of events will be for the US.

First there will be a fiscal/funding crisis that will originate in the bond market, specifically the US Treasury market. Interest rates will shoot up, and either austerity will be imposed on the US in a rather unpleasant and draconian way (the bond market is rather remorseless), or it will be self-imposed (not very likely). My estimations indicate this process will begin before the end of 2012.

Next, if the US fails to heed the edicts of the bond market and tries to maintain spending in the face of rising interest rates or print its way out of trouble, the risks increase that the US dollar will suffer a major decline. Let's say that this process will begin a year after the start of the fiscal crisis.

That's all there is to it. A fiscal crisis possibly (probably?) followed by a currency crisis - all initiated by a leadership crisis.

How long it will take the markets to wake up to this simple progression is anybody's guess. Here we must fall back on a simple maxim that has served us well: Anything that is unsustainable will someday stop.

Last year, the US was not unique in its fiscal and economic woes.

This year, the US has distinguished itself by being the only advanced economy to increase its underlying budget deficit in 2011, according to the IMF.  

Quite pointedly, the IMF has been on something of a tear recently in pointing out that the US is heading in the wrong direction fiscally (and by extension monetarily) and risking a systemic crisis by pursuing an unsustainable path.

On March 20th, the IMF's John Lipsky delivered harsh words (at a forum in Beijing, it should be noted):

Lipsky Says Advanced-Nation Debt Risks Future Crisis as Yields Set to Rise

Mar 20, 2011

The mounting debt burden of the world’s most developed nations, set for a post-World War II record this year, is unsustainable and risks a future fiscal crisis, the International Monetary Fund’s John Lipsky said.

The average public debt ratio of advanced countries will exceed 100 percent of their gross domestic product this year for the first time since the war, Lipsky, the IMF’s first deputy managing director, said in a speech at a forum in Beijing today.

“The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks,” said Lipsky. “The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion.”

I am in full agreement with the assessment that the US is adding to, not subtracting from, the financial and fiscal risks that we face. Such are the wages of attempting to sustain the unsustainable in defense of a status quo that needs to be set on a shelf, an interesting curio of a time gone by.

We've already proven that there's a limit to how much consumptive, non-productive debt can be accumulated, yet the US is now all but isolated in its vain attempts to resurrect that model for one last fling.

The Looming Debt Crisis

The IMF has some hard data to back up its concerns and recently released a report in which it has produced a table that that captures the entire essence of the "grow or die" predicament facing not just the US, but the entire developed world.

There are a number of things to dissect in the table, so let's take them one at a time.

This first is that the total financing needs for the sovereign governments (only) of most of the so-called "advanced economies" has expanded between 2010 to 2011 from 25.8% of GDP to 27.0% of GDP (green circles). This means that even with the alleged recovery fully in place -- a statistical mirage in many respects -- the debt financing needs have grown larger, not smaller.


It is so large that it bears repeating: The gross financing needs of the US and Japan are 28.8% and 55.8% of GDP for 2011, respectively. Those are staggering amounts, and they have, as predicted by any decent framework that combines weak leadership and debt-based money with declining net energy, only grown larger over the past few years.

Zeroing in a bit, we'll note that three nations are sporting fiscal deficits in excess of 10% of GDP (Japan, the United States, and Ireland), while the UK pulls in close behind with an 8.6% deficit (see red and orange colored squares).

How does one support such magnificent borrowing needs at reasonable rates without the explicit promise that growth will soon return? It's impossible, at least for very long. Who will buy all of that debt at ridiculously low rates?

The market's autonomous participants have already arrived at a conclusion, as evidenced by PIMCO's Bill Gross, et al.,selling off their entire Treasury holdings and even beginning to short the whole mess. They are betting that the answer is "only the central banks, and their time is running out."

Following up the report that produced the above table (among many others, some equally disturbing) the IMF has gone on a PR campaign to press the issue:

US Must Cut Massive Debt: IMF

April 12 2011

The International Monetary Fund Tuesday urged the United States to outline credible measures to reduce its budget deficit, pressuring the White House to detail plans to ratchet down record debt levels.

The IMF said while most advanced economies were taking steps to rein in budget gaps, two of world's largest economies — Japan and the United States — had delayed action to nurse their recoveries.

The fact that the IMF has decided to say that the emperor lacks a credible wardrobe tells us much about where are we in the arc of this story (Hint: near the end).

Our job is to figure out what the endgame looks like.


The US is on a fiscally unsustainable path and has almost entirely wasted the opportunity this crisis represented to get its house in order.

Obama, and whoever sits in the oval office next, has an enormously difficult task of explaining to ordinary people why the belt tightening that is to come applies to them and not to the banks that created the mess (and are feverishly handing out record bonuses as a result).

Given this constraint, and the general paralysis of logic that now grips DC, we can almost certainly expect that the resolution to the multi-decade game of kick-the-can will be a crisis of sorts. The IMF has weighed in with its very measured and dry, if not boring, recitation of the risks involved.

I admit to some affinity to their assessment, at the risk of letting my guard down, because they have finally conformed to the views I have been writing about for years. Debt-based money is in a bind. It's damned if we do and damned if we don't.

The only way out is to accept the idea that living standards have to fall to match the prior excesses, an admission that 'experts' agree is politically impossible in the US at this time.

Yet the conditions and risks remain, regardless of what experts think is doable.

The job of any primary bear market -- and we are in the mother of them all -- is to destroy wealth.

Your job is to preserve wealth. But buckle up; it's going to be a rough ride.  

My overall advice for what's to come remains: Convert your fiat money to useful things. True, gold doesn't earn any interest, but neither does money in the bank these days, and gold can't be devlaued away by reckless monetary policy. So holding precious metals for purchasing power preservation should be a fundamental part of your plans. And while there is real risk of a short-term deflationary downdraft in commodities as the Fed jawbones about ending quantitative easing, my general advice is anything that you expect to buy over the next year you should just buy now. What the heck, you'll use it anyways, and you just might buy it for a lot cheaper than later on.

Enjoy life, love your family, and note that the sun still rises, the birds still sing, and all of our human foibles will resolve themselves eventually. We've arrived at a peculiar point in history where attitude is a tangible element of your future wealth and paper money has become like fog on a warm morning.

Make of it what you will. My wish is that you enjoy the ride.

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gregroberts's picture
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Will Precious Metals Survive the Double Dip?

Will Precious Metals Survive the Double Dip?

"However, what may be the single greatest upward price pressure is the increasing fear of a debt crisis leading to a currency collapse. It is important to recognize that, at $1,470 an ounce, gold stands at only some 61 percent of the present value of its 1980 all-time high of $850, which, adjusted for inflation, is some $2,400 an ounce. Given the frail state of the US economy today, the chance of a local collapse is much higher than in 1980, when America was the world's largest creditor - instead of its largest debtor."

M.E.'s picture
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JAG, You might like Martin

JAG, You might like Martin Armstrong's latest missive called "The Other Side of Inflation". He uses a 2,000 year history to illustrate his points. He states, "Gold is the hedge against government. It is NOT what money is but who controls the supply that is the issue. Even if we got rid of paper money, we are still left with politicians who will turn to debasement or weight reductions. It is the government that must be tempered. Not what money is or isn't.". Join the revolution which, at this stage, means calling their bluff on the paper. The real changes will come later.

OctoberLandon's picture
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Letting it all hang out!

Thank you Chris for your honest opinion on how events will unfold.  I've been scrambling through the Internet and Media trying to figure out what might happen next.  Which problems may manifest first?  What may happen to us after that?

Not to sound overly dramatic, but I feel that real civil unrest will be the result of austerity measures imposed by our creditors - not to mention many people exclaiming that we have lost a piece of our sovereignty.  The following currency crisis, will make the poor, poorer - only adding to the civil unrest.

Yes, the truth may be ugly, but sometimes we have to let it all hang out.


SingleSpeak's picture
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Fix this.
robie robinson wrote:

Just having finished two "simple pump" installs, I will vouch for their simplicity and,to me, obvious simplicity and durability. There is nothing that can break that I can't fix.


Robie, it's Ben Bernanke here. So glad I found this post. I kinda screwed up with the dollar printer and was wondering if you could possibly get over here ASAP and fix it. I turned on this printing machine and can't seem to get it to stop.Your services will be well compensated for. Money is no object.  Money mouth

Poet's picture
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11rhymesandreasons wrote:

Poet, that is a great list.  It seems the meek shall inherit the earth.  I was a carpenter (non-union) for most of my adult life, and know firsthand that tradesmen have been considered, well...disadvantaged.  But reading your list makes me realize that people who are accustomed to working with tangible things, whose job security traditionally lasts until the job is complete (and whom are frequently paid commensurate with what was accomplished), will be at an advantage in the new world (hands pre-calloused, attitude pre-humbled).  The times are a changin'. 


Thanks! I only put down some random thoughts on things to have on hand, because someone asked for a list. I'm sure there are lot more things that we all take for granted. I think you'll have a great advantage in a future "World Made By Hand" (to borrow the title of a James R. Kunstler book about a post peak-oil future).


M.E.'s picture
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robie robinson wrote: Just
robie robinson wrote:

Just having finished two "simple pump" installs, I will vouch for their simplicity and,to me, obvious simplicity and durability. There is nothing that can break that I can't fix.



Thanks for this feedback.  I'm ordering one next week and plan on installing it myself.

Travlin's picture
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SingleSpeak wrote: robie
SingleSpeak wrote:
robie robinson wrote:

Just having finished two "simple pump" installs, I will vouch for their simplicity and,to me, obvious simplicity and durability. There is nothing that can break that I can't fix.


Robie, it's Ben Bernanke here. So glad I found this post. I kinda screwed up with the dollar printer and was wondering if you could possibly get over here ASAP and fix it. I turned on this printing machine and can't seem to get it to stop.Your services will be well compensated for. Money is no object.  Money mouth


That's very funny.  Thanks.


oldmanspammy's picture
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Broke? Really?

How do we know how much public debt is too much? It seems to me that one factor that few seem to discuss is how much wealth we have. Our current public debt is about 17 trillion. Our private wealth (not including highways, schools, other public infrastructure) is 55 trillion. So we could pay off all of the public debt and still have 38 trillion “left in the bank” (16 trillion of which is fungible, the rest contained in our homes and other real property… 22 trillion).

If one looks at Debt/GDP ours is currently about half that of Japan and they are still able to borrow money at very low rates. So the arguments that public debt is reducing capital available to private sector doesn't seem to hold either.

I'm not saying we can't have too much debt. I just don't think we are there yet. It seems public debt or surpluses should just be used to counter balance the business cycles. It seems to me if we are smart we would be increasing government spending on infrastructure that will provide a good return in the future -- like schools, transportation and healthcare. We are the most productive country in the world. If we want to borrow and get a better return than the interest we pay isn't that a good thing?

Both the Dems and Repubs are using debt fear mongering for their own purposes (to argue for less government or higher taxes). A couple of my favaorite fears: passing debt on to our grandchildren. When our grandchildren pay it off who gets paid? Other grandchildren minus the debt owned by foriegn entities (currently down from over 40% to 25%). Eqwuating public and private debt. Public debt is mostly money we owe to ourselves.


Foreign ownership of US Treasuries:  4474 billion as of 2/11 (4.5 trillion) (only 26% of total of 17 trillion)

 Foreign ownership of US public debt (2007) 44% (70% of that is owned by Foreign Central Banks) page 14 in:

 Percent of wealth that is fungible: add fungible assets in table 3 of this document (approximately  60%):



Dan Robinson's picture
Dan Robinson
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Romans, unless you're already and "expert" in everything, I recommend buying survival and how-to books, for instance "When Technology Fails" by Matthew Stein. Learn about wild edible foods and other wild resources. Acquire diversified skills as well as things and substitutes for money, which can disappear if you're seen as being "rich".

sofistek's picture
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Actually, Chris, money does earn interest at the bank. The situation may be bad around the world but not all countries are in exactly the same state as the US. In New Zealand, my country, I can get nearly 6% interest on a 5 year term deposit and not far off 5% on a 2 year term deposit. Even a 6 month period can get me 4.5%. So that's also a way to preserve wealth, at least for as long as inflation doesn't go hyper and for as long as the bank you have your money in remains solvent.

But wealth preservation is not as important as skill acquisition. In the end, having some notional funds stored away somewhere doesn't necessarily equal survival or happiness.

And, yes, the birds still sing, but the environment is another big, big, risk factor. I know it doesn't concern you as much as the other factors but we're already in the next extinction event, with species dying off at 100-1000 times the usual rate.

Concerning money, a thought struck me that the whole sorry mess could continue for years or decades (in the absence of the other factors that affect future collapse). I haven't really thought this through but ultimately, isn't money just a means to exchange labour? I realise that debt servicing can eventually overwhelm the budget but, until then, provided people are happy to accept money in exchange for their labour, can't society keep chugging along for quite some time? Just a thought.

oldmanspammy's picture
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I always like it when someone takes the gist of what I say and improve it.

Basically it comes down to abundance vs. scarcity, entropy vs. synergy .... it seems most of us live more or less in one perspective or another. For me, it changes over time. And of course I am more or less in sync with what is really going on.

mountainwoman's picture
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about that hand pump

I have a hand pumped shallow well at my very remote retreat, plus a cistern buried in front of the cabin, also with a hand pump. This is because the well, sadly, is more than a quarter of a mile downhill from the cabin. And while I do have buried pipe from the well to the cistern, it takes considerable electrical power via a pump and a compatible generator to raise that water. So, my homely experience with hand pumps is as follows: get spare parts, especially extra leathers; keep the hand pump covered when you are not using it; and when visitors come, make sure they understand that every drop of water they are using is hand pumped and carried into the cabin by actual people. Finally, I agree that skills are critical and so are good relationships with your country neighbors. But a deep pantry of supplies can be a real matter of survival.

adameran's picture
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Martenson steps in it...thc0655 too

While I agree with Mr. Martenson about many things, in this case he is utterly confused. First, there is zero chance we'll have a default on the U.S.' sovereign debt. The dollar is fiat currency, if nothing else, the government can print enough dollars to pay every nickel of the debt. The famed IMF and "bond vigilantes" are a) incompetent, and b) non-existent. S&P's threatened downgrade of U.S. government obligations is about as accurate as their ratings of the securitized mortgages that led to the "Great Recession." If you believe the IMF is a competent arbiter of economics, then all you have to do is look at the Asian economies that followed their advice vs. those that didn't (hint: the former tanked, the latter recovered). Ditto for Iceland v. Ireland, for another example. Note that the bond markets responded to S&P's threatened downgrade by bidding up the price of the subject bonds. Again: the "bond vigilantes" are non-existent. Read Paul Krugman's blog and editorials about this.

Unfortunately Mr. Martenson has bought the baloney that "big government debt" is a problem. It's not. Period.

...and yes, there are many other problems about which he is correct. This gives me doubts about those others, though.

SagerXX's picture
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adameran wrote: Read Paul
adameran wrote:

Read Paul Krugman's blog and editorials about this.

Until I got to this line, I actually thought you were serious. Phew! That was close...

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