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Adjustable-Rate Nation

Monday, November 30, 2009, 10:13 PM
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Monday, November 30, 2009

Executive Summary 

  • US government borrowing has tilted heavily to short-term, adjustable-rate issues.
  • The very same people who missed the housing crisis have largely ignored or overlooked the current US predicament.
  • The US government lacks any sort of fiscal restraint.  And there's never a good time to cut back.
  • It has been operating like a subprime, cash-poor borrower, electing to borrow more and more.
  • The short-term debt used to finance the Treasury Department must be "rolled over" when it comes due, imposing whatever the new interest rate happens to be at that time. 
  • This will trigger a debt spiral, which will cause the US government to go from insolvency (its current predicament) to bankruptcy (its future condition).
  • A bankrupt nation has few options, little hope, and a lot of regrets. 
  • To protect against the fallout, buy gold, silver, and productive assets that generate the things people need.

This is no way to run a nation.

The US government is operating no differently than a 2005 subprime borrower buying far more house than made sense, and is living beyond its means, happily racking up ever-larger debts by taking advantage of a teaser rate set by Bernanke and his fellow board members.

In early 2004, I was warning people as loudly as I could about a future housing crisis.  No, I am neither an economist nor an all-knowing seer of the future.  I am simply able to spot when something does not make sense and trust that things have a way of working themselves out over time.

It did not make sense to me that a hair stylist in Las Vegas should be able to amass a portfolio of 19 homes that were all being rented for less than their mortgage payments, if they were even being rented at all (this is a true anecdote).

Why was this an obviously broken story that had to end in tears?  Because it simply did not make any economic sense.  It even defied common sense.  After all, if it were possible for everyone to get rich through the miracle of rising asset prices with no value creation, then clever people in the Roman Empire would have figured it out 1500 years ago, and your native tongue would be Latin.

The economic mistake for the hairstylist was in overlooking the fact that cash flows in have to exceed cash flows out, or eventually bankruptcy results.  Clearly, things are a bit different for a government with a printing press over the short haul, but over the long haul, the story is the same.  It's not possible to continually live beyond one's means forever.

 

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