100 Basis Points to Armageddon

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Is there a fender anywhere in Christendom that the financial authorities have not dented yet?

They are lost without a compass. They are up the river without a paddle. At the automatic teller without a pin number. They have no theory that has not been discredited. They have no experience which does not contradict them.

In 2006, they couldn’t see the crisis coming. In 2008, they couldn’t understand it. In 2009-2011, they couldn’t fix it. Their theory told them they couldn’t spot a bubble; it was obvious to just about everyone else. Even here on the back page, we warned readers. Then, the financial elite mistook the problem for a lack of ready cash. Practically every American household knew what the real problem was: too much debt. And then, while everyone else knows you can’t fix a problem of too much debt by adding more debt, the authorities missed the point entirely. Since they began applying their fixes, the national debt of Italy grew $360 billion. Japan’s national debt rose $1.1 trillion. And the US added more than $2 trillion. They may have successfully ‘kicked the can down the road’; but now it is a bigger can. Last week, they tripped on it again.

In these, the world’s 3 leading debtors alone, the problem is now $3.5 trillion worse. And that is just a piece of it. These figures do not count the trillions’ worth of other monetary and fiscal duct tape the feds have run through. Congressman Ron Paul put the figure for the US alone at $5 trillion and asked Mr. Bernanke about it.

What do you think you got for all that money, he wanted to know? The Fed chief remained true to his delusions. The money wasn’t spent, he protested; it had been ‘invested.’

Then, what was the return on investment? By every measure, the US economy is worse off than it was before the fixes began. After $7 trillion in losses, housing is still falling. The jobs picture is even worse. The broad “U6” unemployment rate – which includes those who have stopped looking for a job, part-time workers who can’t get full-time jobs, etc. – increased from 15.8% to 16.2% in June. The number of Americans with jobs fell by a quarter million to 153.4 million. And the time it takes to find a new job now exceeds the time in which the jobseeker typically stops looking – a record of 39.8 weeks. Hourly wages dropped. Hours worked fell too. And the portion of the population that is employed hit a new low of 58.2%.

While the proximate problem in America is at the household level, in Europe, it is in the banks, bailouts and boondoggles. Moody’s, the giant rating company, tossed Irish debt into the junk yard last Wednesday, after already having knocked down Portuguese debt the week before. Greek debt has had junk status for months; but Fitch downgraded it anyway; last week 10-year Greek notes were selling at a 48% discount. Two year debt yielded 36% when we checked on Tuesday. Moody’s said it was looking at US debt too; a downgrade is coming sooner or later.

The bigger the pile of debt gets, the more it stinks. Last week, investors began to notice a bad smell coming from Italy, the world’s third largest debtor. The world’s other two leading debtors – the US and Japan – have $26 trillion of sovereign debt between them. Add Italy and the total is nearly half the world’s GDP. These are big numbers; they’re not going away.

There is nothing especially deadbeat about Italy. At 120% of GDP its government debt is, officially, between that of the US and Japan. Unofficially, it is about even with the US. As for deficits, Italy is a model of integrity. Its deficit is only 4.5% of GDP, compared to America’s 11%.

On these numbers you’d think that the cost of borrowing for one of these deadbeats should be about the same as for another. But recently investors decided that Italian debt could be as fatal as Spanish cucumbers. They sold it. Doing so, they sent yields on 10- year Italian bonds over 6%. Spain pierced the 6% level soon after. Since 7% is viewed as the upward practical limit – this brought all of Europe to only 100 basis points from Armageddon.

The authorities looked on like housecats watching the evening financial news. They saw the images. They heard the words. They had no idea. In Europe, they rushed to put together another bailout.

In America, meanwhile, the day of reckoning approaches too. In two weeks, unless the statutory limit is raised, America will cease making debt payments. It will be “worse than the Lehman bankruptcy,” says former US Treasury Secretary Larry Summers. Armageddon, in other words. But in light of what their fixes have wrought so far, Armageddon is looking better and better.

Regards,

Bill Bonner
For Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. Ron Paul is the only presidential candidate in the U.S. who understands economics. He understands that eliminating the debt, restoring the value of the dollar, and trading with more countries will help to create a stronger world economy.

    Ron Paul is the only candidate asking the right questions. It’s because he has the right answers.

    FirstTimeVoter
    July 25, 2011
    Reply
  2. Ron Paul is the only candidate asking the right questions. It’s because he has the right answers.

    Are you sure? Just because he can ask the right questions does not imply he has the right answers.

    He is a politician and he will (just as they all do) spend a dollar 10 when he only has a dollar.

    Reply
  3. Yes, I am sure that he has the right answers.

    He accurately predicted the bursting of the housing bubble, the devaluing of the dollar, the increase in gold prices, and the entire economic crisis. That proves that he has the ability to accurately predict the future of our economy, or in other words, the answers.

    To your claim that he (like every politician) will “spend a dollar ten when he only has a dollar” is simply a lie. Look at his voting record. He has never once voted for increased spending or an unbalanced budget.

    Good day, troll.

    FirstTimeVoter
    July 25, 2011
    Reply
  4. Oh the arrogance of youth 1st tm voter…I do miss it

    Reply
  5. Oh, the cynicism of the old and jaded… Can’t say that I’m looking forward to it :)

    FirstTimeVoter
    July 26, 2011
    Reply
  6. FirstTimeVoter,

    Continue with your personal delusion of you choose.
    Allow me to point out that the above ‘rule’ I stated about politicians and their spending creating inflation, it was told to me when I was much younger (20 years ago) by someone much older than me at the time.

    At that time (unlike you) I did not dismiss it as a lie. Over the ensuing 20 years I have come to realise not just through history (before my time. do some research into the history of economics) but throughout my history, it is a constant truth.

    And finally please do learn to respect others.
    I take exception to being insulted with the label “troll” when I genuinely am trying to further the discussion. Horses and water eh !!

    Reply
  7. Joe,

    Let me begin by apologizing for calling you a troll. That wasn’t fair.

    However, I take offense to the idea that I do not respect the wisdom of my elders. Why do think I support Ron Paul? He’s not exactly young and hip, but he’s been accurately predicting inflation for years. I agree with you wholeheartedly that inflation is created by politicians spending. Again, that’s why I’m voting for Ron Paul. Call me young and naive, but I trust him to not increase spending and to shrink the size of the federal government. If your ultimate point is that no politician should be trusted and that I’m just wasting my time, then why did you comment in the first place? If your point is that Ron Paul shouldn’t be trusted, I would disagree. If your point is something else entirely, please reply and let me know. I’m a little confused.

    Respectfully,

    Tim

    FirstTimeVoter
    July 26, 2011
    Reply
  8. Tim,

    Well said, I tip my hat and couldnt agree more regarding Ron Paul.

    Unsure why Joey boy has his pants tied in a knot.

    Reply
  9. Tim, cynical?? you bet… jaded, exhausted, never.
    My political heroes have come and gone.
    You filter down eventually to self protection.
    Today’s politicians have no conviction or optimism, they blow in the wind of opinion polls.
    You have certainty,you quote a messiah, a true prophet. Ron Paul.
    Yes,for me Wilson, Thatcher and Blair. My politics, and hopes, swung left and right. They all did some good but disappointed in the end.
    “Events, my boy” change their conviction.
    The need for power and re-election. At that point your hopes are jettisoned for their ambition.
    Yours is the future Tim, and damn good luck to you

    Reply
  10. Henry has covered my scepticism perfectly.

    I too used to have the sort of faith Tim has, but I have learned from experience faith in something is no justification or proof and does not prevent the opposite from either occuring or being found to be true.

    Time and time again the rule, tax a $1 spend a $1.10 has been proved and any exceptions (like your Ron Paul) are soon drowned out, or revert to the very personal self preservation mode of trying to please everyone whilst hurting all.

    It is part of the human condition.

    Were it not the case, then budgets would always be balanced.
    Were it not the case, inflation would not be indemic in our culture.

    Think about that last one. Politicians have us believe that we can have perpetual growth. The adjust fiscal policy to try and guarantee it.

    Apply that logically … In a finite World with finite resources our leaders believe economic activity can and should continue to grow.

    How can this happen unless the economy inflates and the growth is just the consumption of the inflation. The inflation which comes from creating more money within your economy to cover your over-spending.

    I hope this makes sense Tim and gives you something to consider and think about. I do hope Ron Paul turns out to be all you hope, I suspect however, he will not.

    Reply
  11. Henry,

    Thanks for the advice.

    I think the reason that I get so passionate about things is because I see my generation not caring at all. I constantly feel as though I’m fighting an uphill battle, you know? You probably felt the same way when you were my age (which helps me to see your point about human nature). I know that I shouldn’t put my hope in any man, but we do live in a world run and operated by humans, and until that changes, Ron Paul’s my guy.

    Thanks again for the well wishes.

    My generation is going to need all the luck we can get!

    Tim

    FirstTimeVoter
    July 27, 2011
    Reply
  12. Joe,

    Thanks for clarifying your position. I understand where you’re coming from now.

    I realize from my earliest posts how you concluded that I’m convinced that if elected, Ron Paul will change the world!! That’s not what I meant to imply and I can see why you would think I was arrogant for thinking that one man could “have all the answers.” I simply meant to convey that I’m convinced the other candidates will not change America for the better. That’s all.

    Like you, I don’t want to put my faith in government. I want to put my faith back into myself, my work, my family, and my community.

    America is on a completely unsustainable course and I worry about my future.

    You said that the exceptions to your theory are “soon drowned out, or revert to the very personal self preservation mode of trying to please everyone whilst hurting all.” I’ve never heard Ron Paul being accused of the latter :-) However, I see the members of the media, pundits, and various experts drowning him out on a daily basis. This is precisely where my passion and drive come from. I simply want the man to have a fair shake. That’s all.

    Again, sorry for any personal attacks or confusion.

    Best wishes,

    Tim

    FirstTimeVoter
    July 27, 2011
    Reply

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