Debt Woes in a Cosmic Bear Market


Ursa Major in the sky Time to sell stocks is nigh

Last night was bright and clear in France. We could see the Milky Way stretched out against the dark background.

And there was the bear…Ursa Major.

Last week, stocks got hammered…mauled…beaten up…

Market veterans said they had never seen the buy/sell ratio more lopsided towards selling.

But why?

In the past couple of weeks we’ve seen zombies rising up and markets crashing down. Not the way we usually like it. But interesting…no?

In the weekend news comes word that the Social Security Disability program is almost broke – thanks to so many claims.

And California’s official joblessness figure is at 12%.

Want more bad news? What’s wrong with you, dear reader? Do you get a thrill from the suffering of others?

Of course not! You just want to know what’s going on. Besides, you suspected for years that the ‘prosperity’ so many people were enjoying was a fraud. Now, you find out that you were right. People didn’t really have the money to buy all those McMansions and luxury 4x4s… They were living on credit. And now that credit has become the darkest kind of debt…

..dense, heavy matter…and becoming heavier. Like a dwarf star…or an imploded sun…

Why is it getting heavier? Because, as the economy gets crushed under the weight of so much debt, it becomes harder and harder for people to earn the money to pay back their loans.

That’s why debt is always deflationary. When people have to pay debt, they withdraw money from the economy. They save rather than spend. Result = fewer sales, fewer jobs, falling prices…and an all-around feeling of gloom and doom.

Which, of course, is accompanied by falling asset prices. We’ve already seen the housing market fall. It’s down about a third nationwide, and still going down.

Now, we’re watching the stock market go down too.

On Friday, the Dow fell 172 points…after a big whack on Thursday. It will be interesting to see what happens this week. We thought Mr. Bear – Ursa Major – would want stock prices to get up again, after he knocked them down 2 weeks ago. We thought he’d like to see more people come into the stock market theater…before he set fire to it.

Maybe not. Maybe he’s going to work already. Or maybe he’ll lay off for a while.

But if we were you, dear reader, we wouldn’t hang around the stock market at all. Until this Great Correction is over, it’s not going to be a very rewarding place to be…

And more thoughts…

Stock market portfolios are getting squeezed. So are retirement incomes. The 10-year note briefly yielded less than 2% last week. And you know what that means. A lot of pensions aren’t providing the money people had hoped for. The Wall Street Journal:

Many older people are finding themselves in a position they never expected to be in at retirement age: still working or in need of a job.

And the laundry list of reasons just keeps growing. Already battered nest eggs took another beating this month with the market’s wild swings. With interest rates essentially at zero since 2008, income from Treasurys and certificates of deposit is pretty paltry. And the Federal Reserve recently said it would likely keep rates “exceptionally low” through mid-2013. On top of that, housing prices are still in the doldrums, leaving homeowners with much less equity to tap.

More than three in five US workers in their 50s and 60s plan on working past 65 – and 47% of that group say they’ll do so because they’ll need the money or health benefits, according to a 2011 study from the nonprofit Transamerica Center for Retirement Studies.

But in this tight labor market, working into your golden years isn’t easy. And you’ll have to make your age and years on the job come across as assets, not liabilities. In addition, with the current market upheaval, you’ll need a financial plan that puts your savings on the fast track and takes into account how Social Security and Medicare benefits could be affected.

*** What’s going on? Maybe this will be a period like the ’30s. There was a market break in ’29. Then, a bounce that made people think the worst was over. But then came another long, miserable slide….with stocks losing half their value.

If we follow the ’30s pattern, we’ll see the Dow hit a low around 6,000…but it will take years to reach.

We’ll also see unemployment get worse…we’ll see more bankruptcies…and more people on food stamps. And we’ll wait until 2035 before the Dow gets back to 12,000.

So relax. Take it easy. No need for panic.

Our advice… Sell. Buy gold. Be happy. Watch the stars.

*** How goes the empire? Badly. It’s turning into a zombie.

Vladimir Putin says the whole US economy has become a “parasite.” Which is true. Measured by the trade deficit, it takes about $600 billion more than it makes. Measured by the US federal government deficit, the level of parasitism is even higher. The deficit broke the $1 trillion barrier at the end of June.

Where does the US get all this money to spend? That’s what being a zombie is all about – you take resources and finished products from productive sectors. Oil from the Arabs, gadgets from the Orientals, caviar and Audis from the Occidentals. And what do you give them in return? Pieces of paper! I.O.U.s.

Meanwhile, the US military has been zombified too. It is no longer interested in protecting America. It is interested in feeding itself:

American pundits decry the onset of sharp defense cuts, but the Pentagon can’t even account for $1 trillion in its own spending. Isn’t it time to rein in the beast?
By Stephen Glain, August 16, 2011

In its scramble to avoid another legislative gang war over the nation’s debt ceiling, Washington is preparing to shake down the Defense Department in the name of deficit reduction. While budget cutters preoccupy themselves with line-item expenditures, they overlook the Pentagon’s biggest cost center: empire. The burden of global hegemony, the commitment to project force across every strategic waterway, air corridor, and land bridge, has exhausted the US military and will be even harder to sustain as budget cuts force strategists and logisticians to do more with less. A national discussion about the logic of maintaining huge forward bases, to say nothing of their financial and human costs, is long overdue.

American relations with the world, and increasingly America’s security policy at home, have become thoroughly and all but irreparably militarized. The culprits are not the nation’s military leaders, though they can be aggressive and cunning interagency operators, but civilian elites who have seen to it that the nation is engaged in a self-perpetuating cycle of low-grade conflict. They have been hiding in plain sight, hyping threats and exaggerating the capabilities and resources of adversaries. They have convinced a plurality of citizens that their best guarantee of security is not peace but war, and they did so with the help of a supine or complicit Congress. Since the collapse of the Soviet Union, US presidents have ordered troops into battle 22 times, compared with 14 times during the Cold War. Not once did they appeal to lawmakers for a declaration of war.

In ancient times, empires exacted tribute from their dependencies. In the age of American hegemony, just the opposite is the case. In return for the global commons, the United States bankrolls a geopolitical welfare state that allows some of its largest beneficiaries to neglect their basic responsibilities as sovereign states and allies…

The price of this deception is vast. If the Pentagon were a corporation, it would be the largest in the world as well as the most sloppily run. Its procurement budget, at a staggering $107 billion in 2010, expands even as the number of deployable warplanes, combat ships, and troops diminishes. To entice lawmakers into approving costly weapons programs, the Pentagon dangles the prospect of jobs in the states and districts of key lawmakers, a costly way of manufacturing but an astute political maneuver. Waste, inefficiency, and political patronage, no stranger to military- legislative affairs, get more lavish by the year. In April 2008, the Government Accountability Office found that 95 major Pentagon projects exceeded their original budgets by a total of nearly $300 billion. A year later, it concluded that nothing had changed. In 2009, lawmakers larded the Pentagon’s annual budget proposal with nearly $5 billion in programs and weapons it did not request. With arms factories scattered like feeding troughs nationwide, America has become the equivalent of a company town with the Pentagon as primary employer. The making of war, or at least the preparation for it, has become a money center, a business line – a racket, as Marine general and Medal of Honor recipient Smedley Butler put it nearly a century ago.

And here’s another view of the zombie pentagon:

Has our bloated security budget made us safer?
We’ve spent nearly $8 trillion on counterterrorism since 9/11. It’s time to assess the results

By Chris Hellman

The killing of Osama Bin Laden did not put cuts in national security spending on the table, but the debt-ceiling debate finally did. And mild as those projected cuts might have been, last week newly minted Secretary of Defense Leon Panetta was already digging in his heels and decrying the modest potential cost-cutting plans as a “doomsday mechanism” for the military. Pentagon allies on Capitol Hill were similarly raising the alarm as they moved forward with this year’s even larger military budget.

None of this should surprise you. As with all addictions, once you’re hooked on massive military spending, it’s hard to think realistically or ask the obvious questions. So, at a moment when discussion about cutting military spending is actually on the rise for the first time in years, let me offer some little known basics about the spending spree this country has been on since September 11, 2001, and raise just a few simple questions about what all that money has actually bought Americans.

Consider this my contribution to a future 12-step program for national security sobriety.

Let’s start with the three basic post-9/11 numbers that Washington’s addicts need to know:

1. $5.9 trillion: That’s the sum of taxpayer dollars that’s gone into the Pentagon’s annual “base budget,” from 2000 to today. Note that the base budget includes nuclear weapons activities, even though they are overseen by the Department of Energy, but – and this is crucial – not the cost of our wars in Iraq and Afghanistan. Nonetheless, even without those war costs, the Pentagon budget managed to grow from $302.9 billion in 2000, to $545.1 billion in 2011. That’s a dollar increase of $242.2 billion or an 80 percent jump ($163.6 billion and 44 percent if you adjust for inflation). It’s enough to make your head swim, and we’re barely started.

2. $1.36 trillion: That’s the total cost of the Iraq and Afghan wars by this September 30th, the end of the current fiscal year, including all moneys spent for those wars by the Pentagon, the State Department, the US Agency for International Development, and other federal agencies. Of this, $869 billion will have been for Iraq, $487.6 billion for Afghanistan.

Add up our first two key national security spending numbers and you’re already at $7.2 trillion since the September 11th attacks. And even that staggering figure doesn’t catch the full extent of Washington spending in these years. So onward to our third number:

3. $636 billion: Most people usually ignore this part of the national security budget and we seldom see any figures for it, but it’s the amount, adjusted for inflation, that the US government has spent so far on “homeland security.” This isn’t an easy figure to arrive at because homeland-security funding flows through literally dozens of federal agencies and not just the Department of Homeland Security (DHS). A mere $16 billion was requested for homeland security in 2001. For 2012, the figure is $71.6 billion, only $37 billion of which will go through DHS. A substantial part, $18.1 billion, will be funneled through – don’t be surprised – the Department of Defense, while other agencies like the Department of Health and Human Services ($4.6 billion) and the Department of Justice ($4.1 billion) pick up the slack.

Add those three figures together and you’re at the edge of $8 trillion in national security spending for the last decade-plus and perhaps wondering where the nearest group for compulsive-spending addiction meets….

Are we safer?

An April 2010 Heritage Foundation report, “30 Terrorist Plots Foiled: How the System Worked,” looked at known incidents where terrorist attacks were actually thwarted and so provides some guidance. The Heritage experts wrote, “Since September 11, 2001, at least 30 planned terrorist attacks have been foiled, all but two of them prevented by law enforcement. The two notable exceptions are the passengers and flight attendants who subdued the ‘shoe bomber’ in 2001 and the ‘underwear bomber’ on Christmas Day in 2009.”

In other words, in the vast majority of cases, the plots we know about were broken up by “law enforcement” or civilians, in no way aided by the $7.2 trillion that was invested in the military – or in many cases even the $636 billion that went into homeland security. And while most of those cases involved federal authorities, at least three were stopped by local law enforcement action.

In truth, given the current lack of assessment tools, it’s virtually impossible for outsiders – and probably insiders as well – to evaluate the effectiveness of this country’s many security-related programs. And this stymies our ability to properly determine the allocation of federal resources on the basis of program efficiency and the relative levels of the threats addressed.

So here’s one final question that just about no one asks:

Could we be less safe?

It’s possible that all that funding, especially the moneys that have gone into our various wars and conflicts, our secret drone campaigns and “black sites,” our various forays into Pakistan, Libya, Yemen, Somalia, and other places may actually have made us less safe. Certainly, they have exacerbated existing tensions and created new ones, eroded our standing in some of the most volatile regions of the world, resulted in the deaths of hundreds of thousands and the misery of many more, and made Iraq and Afghanistan, among other places, potential recruiting and training grounds for future generations of insurgents and terrorists. Does anything remain of the international goodwill toward our country that was the one positive legacy of the infamous attacks of September 11, 2001? Unlikely.

Chris Hellman is a Senior Research Analyst at the National Priorities Project (NPP). More: Chris Hellman


Bill Bonner,
for The 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.
Bill Bonner

Latest posts by Bill Bonner (see all)


Leave a Reply

2 Comments on "Debt Woes in a Cosmic Bear Market"

Notify of

Sort by:   newest | oldest | most voted
C Richey
5 years 2 months ago

You make some excellent points Bill. I’m pretty fed up with our government continuing to play politics as usual. Instead of the hard choices they need to make, they are slinging blame, quoting fringe groups and pandering to the nutcases…AGAIN.

5 years 2 months ago

Well it’s no surprise that the terror plots were broken up by law enforcement as a recent report shows that the FBI organizes almost all terror plots in the US.

Got to keep up the fear factor to justify all that spending eh?

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to