Two Ways for the US to Go Broke

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We’re in the airport. We can’t seem to get a signal. So, here’s an abbreviated reckoning.

From what we can tell from the newspapers, the US housing market got very bad news yesterday. New house sales dipped to a record low. Never before since they began keeping records a half century ago have so few new houses been sold.

Naturally, house prices are falling too. Why is that? Because the housing industry built and sold today’s houses yesterday. A credit bubble takes from the future. Now we’re in the future. Naturally, there’s not much here. It’s already been taken away…used up…built…spent…consumed. We’ve got yesterday’s houses on the market. And today’s. And tomorrow’s.

Which shows how ridiculous the feds can be. First, they nationalized Freddie Mac and Fannie Mae…to keep them from going broke. Then, they bought mortgaged-backed securities by the boatload…and lent money at zero interest rates…to re-flate the banking/mortgage industry. Then, they tell us that we (the taxpayers) are making money on those securities. Yes, we’re supposed to make a profit as they are sold back into the market!

But now the housing market is in a double dip, and a report in today’s news tells us that Fannie and Freddie may be hiding $100 billion in losses.

Our advice: if you buy a house today, mortgage it heavily. Long term. Fixed rate. Your house will go down in price…but your mortgage may disappear completely.

Another thing taking a beating today is Europe’s periphery debt after the Portuguese voted against austerity. To put this into perspective, there are only two ways to go. When you borrow too much money from the future, you either have to pay it back or you go broke. The Portuguese were trying to pay down their debts, by cutting “services.” But it’s harder to cut services than you might think. Modern democratic welfare states are built on a fraud – that the government can give people more in services than they pay for. Typically, the government takes the extra money from groups that are politically weak – such as the next generation, which doesn’t get a vote.

Citizens don’t like it when the government tries to cut back. And when a majority of voters are on the taking end of the exchange – getting more from the feds than they pay in taxes – it’s very hard (maybe impossible) to impose “austerity” measures.

What the Portuguese election is telling us is that many governments will go broke before they pay down their debt. At least, that’s what it implies…

As Dear Readers know, the US situation is a little more complicated. We have the world’s reserve currency. Our debt is largely held by foreigners. And it is denominated in a currency we alone control. So, we have the ability to go broke in two different ways.

We can do it the old-fashioned way, that is, by being unable to pay our bills when they come due.

Or we can do it the inflationary way – by paying our bills in a currency that is not worth as much as the stuff we borrowed.

Clearly, the second way is the preferred approach. It’s what the feds are aiming for. It’s a major reason the Fed is pumping $4 billion per day into the world economy. And it’s an additional reason to keep interest rates at zero – even after, by the feds’ own reckoning, the emergency is past.

In short, you can cheat your creditors in two ways. You can default honestly. Or you can inflate.

The trouble with inflation is that it is like a bad dog. It doesn’t come when it is called. And when it does come, it comes on so fast it knocks you over. Then, it goes into the house and tears up the furniture.

Japan hasn’t been able to get the cur in the door in over 20 years of calling. And when it came to Argentina, Zimbabwe and Weimar Germany, it what such a nuisance they wished they had never whistled.

But there’s Ben, Tim, and all the rest – dog lovers, everyone of them.

And more thoughts…

We were sitting in a café in Paris yesterday. Near us was a very old man. He was well dressed and clean, with a checkered sweater of the sort grandfathers used to wear.

In front of us, a film crew had set to work. There were trucks with large cables running this way and that. There was a makeshift cantine – where a few people stood and drank coffee. Bright lights were focused on the entry to another café across the street. And then came the actors and director…

It was fascinating to watch. It must have been a film set during the occupation of France in World War II. The entire time we watched, a man in a German officer’s uniform walked out of the cafe…one time, two times, nearly a dozen times…with each effort the technicians adjusted the lights and the director gave further instructions.

At about “take 5” the old man started talking loudly.

“Ah… The [expletives deleted] krauts… I remember them. Heh… Ya…ya… Arbeit mach frei… In the camp…they worked us like dogs. But they didn’t feed us. Ya…we were making artillery for the krauts. Dirty krautsl I would try to ruin every machine I worked with… You know, you put in a little grain of sand. You scratch the barrel. If they had caught me they would have killed me…

“I was lucky to get out alive. Heh… Luckier than a lot of the krauts. The Americans bombed the factory. They leveled the krauts’ barracks…and half the town. Then, they put us to work pulling the bodies out of the rubble. It was madness. Smoke everywhere. The krauts were losing their grip. Heh… I remember the look on in his eyes. The guard didn’t expect that…heh…I found a kitchen knife in the rubble…then I got behind him. He turned his head but it was too late for him…heh… It was nighttime…no lights…they had knocked out all the street lamps… I got out of there…heh….”

Regards,

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.
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mooboo
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Our advice: if you buy a house today, mortgage it heavily. Long term. Fixed rate. Your house will go down in price…but your mortgage may disappear completely.

I appreciate this in the US but what about in Australia? Wait for it to go completely pear shaped and do the same thing… mortgage up to the eyeballs?

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