John Mauldin on the Cancer of Debts and Deficits

Mauldin's latest email is entitled, "The Cancer of Debts and Deficits".  He writes:

“We are coming to the point in the United States when even the US government will no longer be able to borrow at very low long-term rates. That point is a few years off, and we have time to change paths; but as I have shown in previous letters, the longer we wait to get the deficit under control, the fewer choices we have and the more painful they are.”

Mauldin is finally understanding the severity of the economic problems we face but he still has not come to full grips with reality.  The main two things I contest from his opening statements are:

1. that point is a few years off
2. we have time to change paths

The truth is that nobody knows how far off that date is but history shows that the collapse will seemingly come from the clear blue sky.  In other words, an exponential decay will transpire just like it did with GM and just like with AIG, both of which were microcosms of the global debt Ponzi.

But where John is really out of touch with reality is that he thinks there is time to change paths if we just start doing the “right thing” right now, whatever that right thing might be.  Unfortunately, a lot of people are similarly confused.  They mistake the fact that things have not collapsed here in the states like they currently are in several parts of Euroland with the hope that we can avoid a similar fate.  It shows a fundamental lack of mathematical and logical analysis.  It’s the kind of things that scared people say when they have not had time to think things through.  It is a herding reaction.

So let’s analyze why Athens is in flames and why several other Euro-countries are near collapse as well and why Germany and France are beginning to show cracks.  The fact is this: people are figuring out that they have been lied to.  They are figuring out that there is not enough real wealth in the system to fulfill all of the Ponzi Promises that have been made.  When people get screwed out of what they feel is rightfully theirs, they get angry and they strike back.  Period.

In truth, the main driver of unrest is the mass awakening to the fact that austerity of some form or fashion cannot be avoided.  As the saying goes, you really can't fool all of the people all of the time and during the end game you can't fool anyone ever.  If we “change paths”, it means self imposed austerity.  Austerity is all about doing less with less.  Of course, the big boys will fight to keep what they have and economic $hit will roll downhill.  This leads to many of the patsies getting screwed, often the young, the old and the otherwise weak.  Taking all emotion out of the equation, it is a weakness to be critically dependent on anyone but yourself for your basic living needs and thus anyone who is dependent on the corrupt and fraudulent system will feel the effects of austerity. 

As soon as someone “changes paths” (i.e. opts for austerity), the diminished free stuff stirs up violent protests from captured souls who foolishly allowed themselves to become dependent just like it is doing overseas to many people right now.  This is why we cannot just “change paths” so simply as some would like to suggest.  The very act of cutting back on deficit spending will bring on the carnage.  It is no different than getting someone addicted on hard drugs and then cutting off the cheap supply to them.  Some of the druggies will just die, other will lash out: lie, steal, kill, whatever.  Their immediate wants and needs become their only concern.

The only other alternative is to try to maintain the status quo via spending supported by the acquisition of debt and via money printing.  This also leads to chaos eventually because it is keeping the Ponzi running, keeping the con men in power long past the point where it should all have been restructured and social power redistributed to those who are productive economic contributors.  While this “can kicking” exercise is happening, young people are out of work and prices begin to rise for food and energy which hurts anyone living on fixed incomes.  Retirees cannot invest their savings in “safe” investments like government bonds because they pay no yield. Besides that, there is a growing question as to the actual safety of these debt notes.  At some point we will be unable to acquire more cheap debt and then money printing will go into high gear.  Not because the con men want to do that but rather because they see no other choice whereby they get to remain in charge instead of getting killed in the streets by angry mobs.

As for people who think that cutting back on government spending is a panacea, it is not.  Federal, state and local government DEFICIT spending is 18% of our economy.  If we were to balance the budget it would cause a greater depression.  The US economy is not superman.  It cannot withstand an 18% collapse without social and political repercussions.  Unemployment would have to skyrocket if government stopped deficit spending and our GDP would plummet.  If the world saw this happening it would recognize that the end is near for the United States of Money Scam and foreigners would stop lending us money at zero percent interest.  That would lead to skyrocketing interest rates, perhaps as bad or worse than what happened during the Volcker years: 13-17%!! 

The U.S. now has $15 trillion in national debt and it is heavily weighted toward short term maturity treasuries.  In other words, our creditors are all crowded around the door looking for the signal that they should get out.  Given that so much of our debt is in near term treasuries, we will some day face a rollover crisis just like Greece.  Debt that we are currently paying very little interest on will get rolled over into treasuries that bear very high interest.  Thus, even though we might have balanced the old budget, the NEW budget which is based on much higher interest expense will eventually overwhelm government’s ability to collect taxes.

So you see, there is no “right course” to avoid the eventual collapse and government knows it which is why any cuts by either democrats or republicans are for show only.  They cannot cut anything and in fact they have to keep increasing the amounts borrowed or the debt fueled Ponzi will collapse.  In fact, this analysis makes perfect sense.  The U.S is now at a debt to (puffed up) GDP of 100%.  This is just as if you personally racked up a year’s worth of debt on credit cards just to pay for your daily living expenses just because interest rates were low and you were careless about living beyond your true means.  If you got yourself into that pickle, how would you eventually get out of it?  What “right path” do you think would exist for you?  There is no right path for indebtedness to the point of bankruptcy – not for you and not for governments.  Anyone who doesn’t understand this is doing themselves a serious disservice by not paying attention.

The individual defense against the eventual and inevitable collapse of the global debt Ponzi is clear and simple: keep your long term savings in a universally recognized store of wealth that is outside of the corrupt debt Ponzi. There is only one intelligent candidate for this: gold (OK and silver too).  Keep your wealth away from fiat currency and fractional reserve banking and any form of paper asset.  When the unavoidable problems overwhelm the con men you will have many options available to you because in a time of crisis, he who has the gold can make his own rules.  Too bad if you don't like it or if you find yourself unprepared because it has always been thus.  The writing is on the wall in big letters.  If you have viable financial means when others have been wiped out then you can stay in the US, you can go elsewhere, you can do what you need to do in order to secure for yourself life, liberty and the pursuit of happiness.  But if you are totally invested in the con of paper based wealth and if it is fiat currency and government con men that you have placed all your faith in then good luck to you.