International Forecaster Weekly

The US Is Facing A Day Of Reckoning Over The Defecit

A week left to find a solution to the debt problem, downgrading warnings for the US, arguing over cuts, Americans no longer capable of paying off their debt, a game of chicken is being run in Washington over the deficit, European banking system also under great pressure, jobless recovery from the recession, a fiscal doomstay machine.

Bob Chapman | July 30, 2011

As we write on Wednesday, 7/27/11, there is still no debt limit for the US Treasury and the protagonists are still playing politics. That leaves a week to find a solution by August 2nd.

The first House passed a $16.7 trillion cut, cap and balance bill calls for a cut in the fiscal September 1st budget for 2012 and a balanced budget amendment that goes into effect in five years. Why five years, so they can amend it in a couple of years? This is truly political theater. This has little to do with the budget and everything to do with political powers. Worse yet, unless it meets the President’s approval, he will veto the bill.

Rating agencies such as Moody’s have warned of downgrading US sovereign debt, or at best being put on a negative watch list. We believe this is just another part of the play, or part of Wall Street and banking efforts to get extending legislation passed.

The media is solidly behind the Democrats for an increase in the debt limit and little or no cuts in spending. Mainstream media has even taken sides blaming the problem on the Republicans. Usually such positions are more subtle, but not this time.

We see little attempt by Congress to really cut spending. All they are really interested in is spending more money. Congress knows if proper cuts are made it will be very negative for the economy. From their viewpoint and from the viewpoint of their handlers there has to be little or no cuts and an increase to $16.7 trillion to take the economy past the next election in a year from November. A Republican plan to cut $9 trillion over ten years has been rejected out of hand. The consideration now is for $2.4 trillion. Obviously government cannot function unless we continue as we have been building more debt and Americans will just have to be patient until the whole debt edifice collapses. This kind of forced prosperity always has ended badly. Just look at history, it is all there for you to see. The same mistakes over and over again. America’s Keynesianism is certainly the antithesis of sound money. That is what the basis to the problem is. The corporatist fascist model. The model that has been foisted upon us since 1935.

If the public, and Congress for that matter, understand the concept of sound money we wouldn’t be in the dilemma we are in today. Today money saved for the future is ravaged, so there is little saving and hyper-extended consumption. The problem created is inflation bordering on hyperinflation. Thus, the seed money needed to grow the economy is spent and lost to investment. If we look at what inflation is doing we know money is not worth saving.

The dollar has lost some 98% of its value and from our viewpoint Americans are no longer capable of paying off their debt, which goes higher daily. Thus far they have been able to service that debt. There will come a time when they will not be able too, and then what happens? You need rising GDP and prosperity to service debt and that is not happening. $4.3 trillion in debt has been created over the past 2-1/2 years to create an average growth of 3%. That has turned government and the Fed into money machines. Something they cannot do indefinitely. The flipside is we are already into double-digit inflation.

We have seen as a result of having no backing on the US dollar it has been a fiat currency for 40 years, and the result has been the dollar has fallen precipitously in value. Gold backing stability is non-existent and government and the Fed have been free to create money and credit as they please.

Those in financial power know this game cannot go on indefinitely and that is why they create wars as a diversion or as a cover, for a failing financial and economic system. Besides, war is very profitable for the Illuminists, especially when you are financing both sides.

The Fed’s answer to the problems they deliberately created has been to supply endless supplies of money and credit. Thus, between 2008 and July 2010, they injected $16.1 trillion into world banking sectors. $7.75 trillion went to just four US banks, who happen to own the Fed. The remainder went to foreign financial institutions. The US big hitters were Bank of America, Morgan Stanley, Citigroup and Merrill Lynch. The result is that these banks are still broke and allowed among others to carry two sets of books. The other recipients were Barclays UK $868 billion; Bear Stearns $853 billion; Goldman Sachs $814 billion; Royal Bank of Scotland $541 and $181 billion, or a total of $722 billion; Credit Suisse of Switzerland $262 billion; Lehman Bros. $183 billion and BNP Paribas of France $175 billion. This was all done in secret and the Fed was forced to reveal these transactions under the Dodd-Frank bank legislation. After these revelations it is not surprising that current real inflation is 10.6%. We expect it to be 14% by the end of the year. Next year QE2 and stimulus 2 will provide us with 25% to 30% inflation.

Here we have a government and Federal Reserve with no contingency plans if there were to be a default. They are using a method of keeping the economy going, that has proven to be a failure over and over again. Worse yet, they know what they are doing will fail. Just read the 1988 Bernanke-Boskin white paper on the subject. If Asia, particularly China and Japan continue to buy no, or only a little US debt, the bottom is sure to fallout of the US debt market. The Fed is currently buying about 80% of Treasury and Agency debt; does one really think they can monetize Asia’s $3 trillion Treasury holdings? This also means that Asia doesn’t know what to do with their dollar foreign exchange. They have no contingency plans either. One of the dirty little secrets is that many other nations cannot hold sovereign bonds rated less than AAA. If the US has its credit rating lowered their holdings will have to be sold. We ask, to whom? Could it be the Fed? If it is that will quickly bring on hyperinflation.

We see that the escapades of the Treasury and the Fed have brought ire from the Chinese, who are telling them stop your foolishness with the debt limit immediately. In the Chinese Dagong the credit rating of the US has already been lowered to A+ from AA eight months ago. Light pressure will continue from China until the US gets its act together.

The US rating agencies have been under great pressure by the White House to keep their mouths shut and stop their warnings regarding US government credit worthiness. That was accompanied by a plea to them to not say anything about credit. The administration is scared, especially after government credit was put on negative watch.

A game of chicken is being run in Washington by two groups of politicians run and owned by the same group of people behind the scenes. They all want enabling debt extension with a small touch of austerity. They want a deal that has the legs to keep the economy going until after the next election. The most important thing they want is a reduction in Social Security and Medicare, so those funds can be used to reduce debt and fund the military industrial complex. They also want starvation and the inability to buy drugs by the elderly to hasten their demise. That means less Social Security and Medicare spending. In two years we will also have the Obamacare death panels, where massive elimination will be put into motion. There is nothing the Illuminists despise worse than useless eaters. There is ample evidence that these elitists, by their own words, want to reduce world population by 60% to 90%, dependent on which of these persons you listen too. Last week Ted Turner opted for 90% on CNN. That is what the fight regarding debt extension is all about. The only forthright and honest person in Congress to call it the way it is, is Ron Paul. He says the bill sanctions the status quo and that it is impossible to balance the budget without cutting military, Medicare and Social Security spending and that is impossible. The debt limit will be raised, but we fervently hope without Social Security and Medicare cuts. You have to understand your adversaries. These people in Congress are almost all paid whores and the people who control them with money are insane. If you can grasp that you can understand what really this is all about. Watch carefully which members won’t allow military cuts and which want to cut SS and Medicare and then you will have identified the enemy.

One more view from Europe. We are probably near the end of the first wave of European problems. Still hanging in the balance is the 2nd bailout program for Greece. The EU approval is yet to come and the Germans are furious with the deal, Merkel and the CDU, Christian Democratic Union. If approved this will be Greece’s last bailout. Next comes bankruptcy. Greece is a tiny part of the EU, but it could be the catalyst that brings down the euro. It would be precedent setting and deeply affect the future of the other five nations in financial trouble. The outcome for Greece unless they have perpetual bailouts, is default. It could be months away, but could be 1-1/2 years away, but default is sure to come. Can you imagine the idiots in the ruling party of Greece took licenses away from taxi drivers and have had 10,000 of them striking for more than a week and each day they demonstrate brings more chaos to the country.

As a result of what is going on bond losses by the banks as a result of default could take some of them into insolvency. If all six nations defaulted the loss would be $2.5 trillion. Then there are the derivatives as well. Of that Greek debt is about $500 billion. Such an occurrence could take down the European banking system, which would lead to the default of England and the US.

The Great Recession destroyed all kinds of jobs, but the not-so-great recovery has so far replaced the lowest-paying jobs at a much faster pace than higher-paying ones, according to a new analysis of Census Bureau data.

Workers navigating the current labor market are facing a "significant good jobs deficit," said the National Employment Law Project, the worker advocacy group that crunched the Census numbers.

Low-wage occupations saw job growth of 3.2 percent from the beginning of 2010 to the beginning of 2011, while mid-wage jobs only grew by 1.2 percent, according to NELP. During the same time period, higher-wage jobs fell by 1.2 percent. In other words, there are more new jobs for retail salespeople, office clerks, cashiers and food prep workers than for machinists, managers, nurses and accountants.

To make matters worse, low-paying jobs pay even less than they used to, according to the report.

The skewed job growth comes after unbalanced job losses during the Great Recession.

"Of the net employment losses between the first quarter of 2008 and the first quarter of 2010," NELP said in its report, "fully 60 percent were in mid-wage occupations, 21.3 percent were in lower-wage occupations and 18.7 percent were in higher-wage occupations."

The analysis confirms of one of the "new rules" workers have faced since the onset of the recession: Don't expect to make more money at your next job.

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Pittsburgh's Bob Poropatich has been working 44 hours a week at a coffee shop and a grocery store since he lost his job as a manager for a major clothing retailer in 2008.

"Together both jobs pay me not even close to a third of what I made when I had just one job," Poropatich told HuffPost. "My salary used to be close to $70,000 and with an annual bonus. It's not a fortune, but it's a nice middle class salary. And now I don't know if I even make $15,000 a year."

Poropatich keeps a sense of humor even though he's found his experience frustrating, particularly when his former boss came to the coffee shop for a latte. "I live in the city of bridges so I'd have my choice of about 20 or 30," he said. "But I couldn't jump -- I can't swim!"

Although NELP's report stresses that it's too early to tell how the recovery will shake out, it also warned that the good jobs deficit is a legacy of longstanding inadequate mid-wage job growth that started before the recession began. NELP also said that the economy is still short 11 million jobs since the start of the Great Recession.

The new data update a similar report NELP did in February analyzing job losses and gains across industries. NELP did its new breakdown by putting data for 366 occupations into three groups ranked according to wages, tracking changes from 2008. Workers in the lowest-earning occupations earn between $7.51 and $13.52 per hour, while workers in the highest-ranking jobs earn between $20.67 and $53.32 per hour.

"Growing wage inequality in the United States is a phenomenon that's three decades in the making, and which the recession only exacerbated," said Annette Bernhardt, the report's author. "We need to pay attention to these striking patterns of slow and unbalanced growth as we seek ways to restore America’s economy and create the good jobs America’s workers need and deserve."

 Orders for U.S. durable goods unexpectedly dropped in June, raising the risk that a slowdown in business investment will weigh on the world’s largest economy in the second half of the year.

Bookings for goods meant to last at least three years fell 2.1 percent after a 1.9 percent gain the prior month that was smaller than last reported, the Commerce Department said today in Washington. Demand for business equipment, including machinery and computers, also dropped.

Manufacturers face a slowdown in consumer spending just as they are poised to rebound from the parts shortages caused by Japan’s earthquake, indicating production may keep cooling. Companies are also cutting back on hiring, which may further temper household demand.

“The momentum in capital spending has slowed,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York. “Unless we get a pickup in consumer demand, the overall rebound in growth is going to be pretty moderate.”

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.0 percent in the week ended July 22.

The MBA's seasonally adjusted index of refinancing applications lost 5.5 percent after a 23.1 percent jump the previous week. The gauge of loan requests for home purchases was down 3.8 percent.

The refinance share of mortgage activity dipped to 69.6 percent of total applications from 70.1 percent the week before.

Fixed 30-year mortgage rates averaged 4.57 percent, rising from 4.54 percent.

The number of people who signed contracts to buy homes rose for a second month in June. But the gain was not enough to signal a rebound in the weak housing market.

The National Association of Realtors reported Wednesday that its index of sales agreements for previously occupied homes rose 2.4 percent in June to a reading of 90.9. A reading of 100 is considered healthy by economists. The last time the index reached that level was in April 2010, the final month when buyers could qualify for a federal tax credit.

Contract signings are typically a reliable indicator of where the housing market is headed. That's because there's usually a one- to two-month lag between a sales contract and a completed deal.

But the Realtors group says a growing number of buyers have cancelled contracts ahead of closings after appraisals showed the homes were worth less than they bid. A sale isn't final until a mortgage is closed.

Plunging rates for chartering container vessels that carry sneakers, furniture and flat-screen TVs may signal a U.S. consumer slowdown and losses for shipping lines in what is traditionally their busiest time of the year.

Fees for hiring vessels have fallen 9.3 percent since the end of April, according to the Howe Robinson Container Index, which tracks charter rates for a range of vessels. Last year, the index surged 56 percent in the period, as lines added ships on demand from U.S. and European retailers restocking for the back-to-school and holiday shopping periods.

“The troubling part is that charter rates are falling in the peak season,” said Johnson Leung, head of regional transport at Jefferies Group Inc. in Hong Kong. “Sentiment among consumers and retailers isn’t very strong.”

Voters are more convinced than ever that most congressmen are crooks.

A new Rasmussen Reports national telephone survey finds that 46% of Likely U.S. Voters now view most members of Congress as corrupt. That’s up seven points from June and the highest finding yet recorded.  Just 29% think most members are not corrupt, and another 25% are not sure. (To see survey question wording, click here.)

Similarly, a whopping 85% of voters think most members of Congress are more interested in helping their own careers than in helping other people. That’s a record high for surveys stretching back to early November 2006.  Only seven percent (7%) believe most of the legislators are more interested in helping others.

These findings come at a time when voter approval of the job Congress is doing has fallen to a new low.  Just six percent (6%) of voters now rate Congress' performance as good or excellent. Sixty-one percent (61%) think the national legislators are doing a poor job.

Rasmussen Reports has asked these questions monthly since June 2008 and sporadically before that.

While some believe that people hate Congress in general but love their own representative, just 31% believe their own representative is the best person for the job.  Most think it’s at least somewhat likely that their own representative trades votes for cash

(Want a free daily e-mail update? If it's in the news, it's in our polls).  Rasmussen Reports updates are also available on Twitter or Facebook

The survey of 1,000 Likely Voters was conducted on July 24-25, 2011 by Rasmussen Reports. The margin of sampling error is +/- 3 percentage points with a 95% level of confidence. Field work for all Rasmussen Reports surveys is conducted by Pulse Opinion Research, LLC. See methodology.

Most voters don't care much for the way either party is performing in the federal debt ceiling debate.  The majority of voters are worried the final deal will raise taxes too much and won't cut spending enough.  Just 23% of Adults are at least somewhat confident that U.S. policymakers know what they’re doing when it comes to addressing the nation’s current economic problems.

Thirty-eight percent (38%) of voters now trust Republicans more than Democrats when it comes to handling the issue of government ethics and corruption.  But nearly as many (35%) trust Democrats more. Voters trust the GOP more on nine of 10 issues regularly tracked by Rasmussen Reports including the economy, taxes, health care and national security.

Republicans lead Democrats again this week on the Generic Congressional Ballot as they have every week since June 2009.

Voters under 50 believe much more strongly than their elders that most members of Congress are corrupt. Union members share that view more than those who are not unionized.

Investors are less likely to believe most congressmen are corrupt that non-investors are.

For now, most voters would opt for a congressional candidate who balances spending cuts with tax hikes to lower the federal debt over one who’s totally opposed to any tax increases. 

Just before last November’s elections, 52% of voters said most members of Congress get reelected not because they do a good job representing the folks at home but because election rules are rigged to their benefit.  Only 17% felt incumbents get reelected because they do a good job representing their constituents, while 31% were undecided. These findings were consistent with previous surveys.


In the palavering over the Greece bailout, an obstacle was the European Central Bank's insistence that nothing be done that might allow the ratings agencies to declare that Greece had defaulted on its debts or at least not until the bank received taxpayer guarantees for its own holdings of Greek debt. This caused some not unreasonably to ask: Why can't the rating agencies get on the team? Who do they think they are? Where do these disreputable companies (remember their role in the subprime debacle) get off endangering the whole euro project?

One answer is that the rating agencies have a commitment to buyers and sellers of credit default swaps, designed to compensate bondholders when, say, a Greece defaults. The raters have a job to do and would be morally and legally culpable if they didn't do it. That job is to downgrade Greek debt to default status if and when Europe goes ahead with its latest bailout plan to impose losses on Greece's bondholders.

There is a parallel obligation in case the U.S. defaults on Treasury debt, but the U.S. is not going to default. Now that the prospect of a debt-ceiling stalemate is in view, it behooves us to differentiate between a government shutdown and a default.

Members of the House Financial Services Committee following a closed-door meeting with economists from Standard & Poors, July 21

Even without the Treasury empoweredto borrow, plenty of cash will still be coming in, plenty of assets exist that can be liquidated. John Silvia of Wells Fargo told Bloomberg TV that a partial government shutdown (which still isn't a default) might not be needed for at least two weeks beyond the artificial Aug. 2 deadline set by the Obama administration in the wholly artificial debt-ceiling crisis.

But now we have a new problem. The rating agencies, especially Standard & Poor's, have decided to join the politicians in turning an artificial crisis into a real one. S&P says it plans a U.S. debt downgrade, regardless of any debt-ceiling outcome, unless it sees a "credible" plan to reduce future deficits by $4 trillion over the next 10 years.

This has become the real worry for Wall Street, but why? America's spending debate does not remotely make it any more of a default threat than it was a week or month or year ago. America's IOUs are still completely acceptable to the markets.

Even in the long term, the threat is not to bondholders. The threat is to Americans under 50 who think they can rely on Social Security and Medicare. The threat is to countries that hope the U.S. will fight their wars for them. The threat is to K Street bandits trying to live off federal handouts.

But the debt to bondholders will be the last to be dishonored—not least because, unlike a lot of claimants, bondholders can be satisfied with inflation-ravaged dollars.

For the unwarranted power granted to rating agencies, which after all merely issue opinions, blame U.S. law and regulation. These require bankers, pension funds and other regulated investment funds not just to consult ratings, but to act on them.

When the cart is properly positioned in relation to the horse, notice what happens. Ratings opinions are treated as opinions. S&P recently downgraded the debt of Japan. The price of Japanese debt actually went up because the market made its own judgment. Citigroup and Goldman Sachs last week promoted a package of Triple-A commercial mortgages to investors. Investors vetoed the deal because they didn't agree with the ratings.

This is not to say that America doesn't have bitter political wrangles ahead. But S&P and others offer nothing of value in rating the messiness of our political debates.

On the contrary, they step out of line in presuming they must be satisfied with our current spending priorities in order to be satisfied with the long-term payability of America's formal debt.

There's a reason the monumental unfunded liabilities of Social Security and Medicare are not counted as part of the federal debt they don't have to be paid. Any Congress we elect a new one every two years can vote these obligations out of existence. Indeed, an industrious band of academics associated with the National Bureau of Economic Research has shown that the Western world's "risk-free" pay-as-you-go retirement systems are anything but "risk-free" to beneficiaries benefits can be and have been reduced in line with the resources available to pay them.

Such battles lie ahead. They will not be enjoyable to Americans. We may experience slow growth and stagnant living standards. We may also find a few low-hanging fruits, such as tax simplification and bringing price competition to health care. If anything, today's debate should be a net plus for U.S. debt because it has moved the question of fiscal sustainability to the center of American politics.

In any case, how successive electorates decide to spend their tax dollars, aside from meeting their obligations to bondholders, is the electorate's business. It is foppish in the extreme of S&P to imagine its opinion is needed or valued, and one more reason to expedite a rare useful provision of Dodd-Frank its requirement that federal law be purged of language requiring investors to act on the opinions of rating agencies.


Former Federal Reserve Chairman Alan Greenspan is taking government regulators to task for not letting more big financial houses fail back during the credit crisis.

Every rich-country government must choose between setting aside wealth to contain catastrophes or use that wealth for its own prosperity.

Since the 2008 crisis began, the U.S. government has erred heavily on the side of caution to the detriment of its own growth, Greenspan writes in an Op-Ed in the Financial Times.

“American policymakers, in recent years, faced with the choice to assist a major company or risk negative economic fallout, have regrettably almost always chosen to intervene,” Greenspan writes.

U.S. banks are holding on to $1.6 trillion in reserves as buffer capital courtesy of the Federal Reserve. This is the result, Greenspan contends, of the U.S. decision to bail out Bear Stearns rather than letting it crash.

If the investment bank had been allow to collapse, he writes, banks such as AIG and Lehman might have put more money aside to protect themselves from the same fate. They clearly did not, and the government was forced into the market to save them.
Since banks now can sit on their Federal Reserve money and earn interest at no risk they have less incentive to lend it and the U.S. economy is stagnating,Greenspan writes.

“This bias leads to an excess of buffers at the expense of our standards of living,” he maintains.

Meanwhile, investors nervously eye the latest potential calamity a presumptive default by the U.S. government within days and it’s unclear whose head is on the chopping block, if anybody’s.

"If there is a financial meltdown and panic, you don't know where investors will go," Gifford Combs, a portfolio manager at Dalton Investments, told The Associated Press.


Seventy-three percent of Americans in Gallup Daily tracking over the weekend said the U.S. economy is getting worse. This is up 11 percentage points from the three days ending July 6, and the worst level for this measure since March 2009 [the bottom of the crisis]. Gallup's Economic Confidence Index fell to -46 -- down 16 points since early July.

LBJ greatly expanded the US welfare state with his “Great Society” program in 1965. The intent of the “Great Society” program was to eradicate poverty in the US. The poverty rate at the time was 14%.

After spending tens of trillions of dollars, the US poverty rate is now14.3%; US living standards peaked in 1973 and the middle class has been steadily eviscerated. Plus the US is now near bankruptcy.


The U.S. is "not a triple-A credit" and is running a "fiscal doomsday machine," David Stockman, former federal budget director under President Reagan, told CNBC Thursday.

"The system is totally broken. There is a complete stalemate," Stockman said. "They [credit agencies] aught to get it over with, cut the rating and begin to create some reality both in terms of the financial markets and the American public.

"The problem is not the ceiling, but the debt," he added. "It's the $6 billion a day that we're borrowing day in day out."

Stockman believes that Washington will come to some type of an agreement at the 11th hour, but it will only be a short-term fix.

"We are going to be facing a day of reckoning here, and I don't know whether it's six months from now or a year from now," Stockman concluded.