Friday, February 18, 2011

a tipping point is nearing

American Thinker | We are facing a tipping point. There will soon be a crisis affecting US citizens beyond any experienced since the Great Depression. And it may happen within the year. This past week three awful developments put a dagger into the hope for a growth-led recovery, which held promise of possibly averting a debt and currency implosion crushing the American economy.

The first was a little-noticed, but tragic, series of events in the newly elected House of Representatives. The speaker, Mr. Boehner, had given the task of fashioning the majority's spending cut agenda to Representative Paul Ryan (R-Wisconsin), a rising conservative star representing the vocal wing of fiscal conservatives in the House. Promising to cut $100 billion of government spending, Mr. Boehner spoke before the elections of the urgency to produce immediately when Republicans took control.

The second awful development to occur last week was the employment report from the Labor Department, describing employment conditions in the U.S. economy in January, 2011. The report was packed with statistics, all pointing to anemic growth with a modest pickup in manufacturing employment. The little-noticed (not by the bond market) aspect of the report was the "benchmark" revisions, an attempt to get the total picture more accurate each year than simply adding up all the monthly change numbers. This year's benchmark revisions showed two alarming things: a decline from previously reported employment in December 2010 of nearly 500,000 jobs, and a reduction in the workforce of a similar amount.

The third development of the last week which received much less press than the Egyptian crisis is the "new normal" in Social Security. The CBO released a report disclosing that the net cash flow for the Social Security trust fund -- excluding interest received from the book entry bonds it holds in U.S. debt -- will be negative $56 billion in 2011, and for every year hence even more so. This is the train wreck that was supposed to happen in 2020. It is upon us now. Any limp action by conservatives to bring this program into solvency can be expected only to slow the raging river of red ink this behemoth program (along with its twin Godzilla, Medicare) spills on U.S. citizens. With no political will to fix them, these "entitlements" will obligate Americans to borrow more and more money from China--to honor promises we simply refuse to admit we can't keep.

So why do these developments argue for a crisis of Great Depression proportions? Because they speak unequivocally of our pathway to insolvency, and the potential of currency failure via hyperinflation, despite the hopes of conservatives and market participants to see a halt of such direction. Housing prices, the foundation of so much of private citizen debt loads, are destined for stagnation -- not inflation -- as the supply of homes is far greater than the demand -- 11% of the nation's homes stand empty today. When the world begins to recognize that there is no fix for America's borrowings, a fast and brutal exodus from our currency and bonds can send us a shock in mere weeks or months.

Unlike the Great Depression, however, we will enter such a shock in a weakened state, with few producers among us and record mountains of debt. More cataclysmic is the specter of inadequate food, as less than 4% of us farm, and those that do may cease to be as productive or may not accept devalued currency as payment, should the tipping point be crossed. Corn and wheat prices in the U.S. have nearly doubled in less than 12 months, using our rapidly evaporating currency as the medium of exchange.

5 comments:

SoloInto said...

CNu, this is the type of shit that makes me want to go off the grid. You're a smart dude, what have you done in preparation for this?

On another front I have been shorting USD pairs on the forex for the past 9 days. Let's put it this way, the devaluation is real.

CNu said...

ganged up, gunned up, pumped up, and stocked up - for the past decade - in earnest.

Big Don said...

Easy pickings for 64130...

Big Don said...

Gonzalo on target today:
http://gonzalolira.blogspot.com/2011/02/we-owe-how-much-waiting-for-big.html

CNu said...

Maybe he and Mrs. Don are like that elderly cannibal couple in Book of Eli?

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