Trumpeting American debt default

 

Guest post by Simon Black

I’ve often joked very tongue-in-cheek that Donald Trump is the only person qualified to be President simply because he’s declared bankruptcy four times.

Trump himself talks up his own debt credentials, saying “I’m the King of Debt,” and “I know more about debt than practically anybody.”

He’s flat wrong, of course.

Trump may have racked up billions in debt for his companies, but Barack Obama has racked up more debt for America than anyone else in the history of the world.

That said, Trump does have mad street cred when it comes to debt.

In 1991, 1992, 2004, and 2009, Trump filed under Chapter 11 of the US Bankruptcy Code to reorganise his business debts.

Each of these constitutes a default, i.e. a violation of the original terms between the borrower and the lender.

And as I joke (only half-kidding), that’s precisely what America needs: default.

Stop kicking the can down the road, admit that you can’t pay your obligations, hit the reset button, and get on with it already.

Yet anytime I talk about US government debt, there’s invariably a voice in the crowd that says, “yeah, but we owe it to ourselves. . .”

This is one of the biggest lies in finance.

People have actually become convinced that the US government’s $19+ trillion nominal debt, and $60+ trillion total debt, doesn’t seem to matter because ‘we owe it to ourselves.’

First of all, is this true? Sort of.

According to the Treasury Department, foreigners hold roughly $4 trillion of US government debt.

The rest of it—the vast majority of US debt—is owed to various domestic agencies, banks, and citizens.

The #1 owner of US government debt, in fact, is Social Security... in other words, all current and future American retirees.
Next comes the central bank-- the Federal Reserve, which holds $2.46 trillion worth of US government debt according to its most recent balance sheet.

Just on the heels of the Fed are other US government agencies (like the Defense Department and the FDIC) which also own US debt.

Then, of course, are all the thousands of banks and pension funds in the United States, which routinely buy US government debt.

And last but not least are all the individuals and companies across America who own US government debt as part of their portfolios.

So, yes, a minority portion of US debt is owed to foreigners.

What eludes me is why anyone thinks this is OK…

It’s like saying, “well I owe grandma a million bucks, but she won’t mind if I don’t pay.”

Ummm. Come again?

The US government is totally unable to pay its debt. The debt has been rising for decades, and they haven’t been able to run a budget surplus in 20 years.

Not to mention they have to borrow money just to pay interest on the money they’ve already borrowed at a time when interest rates are at historic lows.

Debt is already over 100% of GDP, and even the government itself predicts this number to rise.

At this point default is an almost mathematical certainty. The question is-- default on whom?

Defaulting on the debt owed to Social Security means that hundreds of millions of current and future retirees have their lives turned upside down.

Defaulting on the Federal Reserve means that the Fed will become formally insolvent, creating a massive currency crisis in the Land of the Free.

Defaulting on other government agencies means that the Defense Department (among others) won’t have any more money to operate… so they’ll just end up increasing your taxes to make up the difference.

Defaulting on banks and pension funds would cause every bank to fail, creating an unprecedented financial catastrophe.

So the fact that ‘we owe it to ourselves’ means the debt is even MORE important. And that’s what’s so scary.

Think about it-- it would actually be better if the US government owed 90% of its debt to the Chinese.

In that case, they would simply make the Chinese out to be evil, and then selectively default on that debt.

The rest of the world would probably go along with it, and America would get a pass. US citizens, banks, corporations, etc. would be largely unaffected.

But that’s not going to happen.

There’s a lot of tough talk about negotiating the debt with the Chinese… but this is all hot air.

Even if they default on the Chinese, they still owe tens of trillions to Americans that they have absolutely no hope of paying.

Some people think, ‘well can’t they just restructure the debt?’

No. First of all, restructuring is just a fancy way of saying ‘default.’

It means that you’re not going to honour the terms of the original agreement, and instead work out more favorable terms to pay off the debt.

But… what terms can possibly be more favourable?

Uncle Sam is already paying record low interest. There’s nothing left to restructure… no terms they can renegotiate which are more favorable than they already have.

Bottom line, the US government can’t possibly meet its obligations… so the only hope is to default.

They’ll either outright default and cause any number of major crises in the financial system or the American retirement system.

Or they’ll default on the promises they’ve made to their taxpayers, including the solemn obligation to maintain a sound currency (something they already abandoned long ago.)

Look, understanding this reality doesn’t mean that you’re negative or pessimistic.

There’s nothing pessimistic about acknowledging basic arithmetic.

If this isn’t the start of the crisis, just imagine how bad the real crisis is going to be

Guest post by Simon Black, the Sovereign Man

Chances are you’ve never heard of William White.

You might have heard of the organisation that he used to manage—the Bank of International Settlements (BIS).

The BIS is often called the central bank of central banks; their role is essentially to facilitate international financial transactions among the world’s central banks.

So they are a major component in the international financial system, just like the IMF and World Bank.

William White is a central banker who used to be on the BIS management committee. And this makes him a key member of the global financial establishment.

It’s not too often that central bankers are particularly transparent with the public.

Ben Bernanke famously told the world in July 2005 that there wouldn’t be a nationwide decline in home prices in the United States.

Then just a few months later when home prices did fall, he told Congress that the adverse effects of the housing market were ‘contained’ and wouldn’t affect the broader economy.

He was dead wrong on both accounts. And one of the biggest financial crises in history broke out shortly thereafter.

Central bankers seem to always miss the crisis just around the corner.

That’s pretty scary given that they have the power to dominate and control just about everything in the entire economy.

And despite a serial track record of failure, we’re just supposed to trust them to be smart guys. It’s madness.

A few days ago, however, William White gave an interview stating some things that you never hear coming out of the mouth of a central banker. Ever.

According to White, the global financial system is dangerously unstable.

“The situation is worse than in 2007,” he said, and went on to explain that central banks no longer have the ammunition to fight off a major crisis.

He railed against the mountain of government debt that has accumulated worldwide, saying that “it will be obvious in the next recession that many of these debts will never be serviced or repaid.”

White also suggested that banks, particularly in Europe, will have to be recapitalised on an unimaginable scale.

And due to all the new regulations, it will be depositors who have portions of their accounts confiscated by the state in order to fund the bank bailouts.

William White is not alone.

Michael Bury, the man who made $100 million betting against the last housing crisis, sees the same thing.

In an interview last month, Bury spoke about the “absurdity” of the massive level of debt in the system, and the Federal Reserve’s pitiful balance sheet.

When he gave the interview, the Fed’s balance sheet was leveraged 77:1. Today, barely a month later, it’s over 100:1. Incredible.

Financial markets have been in panic mode since the beginning of the year.

Just in the first few weeks of January, US stocks are down more than 10%. In China, the epicenter of the chaos, stocks are down 20%.

Commodity prices continue to fall. Pessimism abounds.

Look, maybe this is it. Maybe the global financial system has truly reached its limit.

Maybe the world has realized that the path to prosperity is not in conjuring money out of thin air, raising taxes, or going deeper into debt.

Maybe people have finally figured out that an insolvent government and insolvent central bank cannot possibly continue to underpin the entire financial system.

Or maybe not.

Maybe this will all be forgotten in a few weeks. And this coming Christmas no one will remember the great crisis of January that almost was.

But to me the incredible thing is how much panic there has been, particularly in banking and financial markets, just at the mere HINT of problems in the system.

It’s a clear indication of how quickly people can lose confidence and an entire system can become unglued.

Maybe things drag on like this for years, with government continuing to pile up debt and central banks continuing their slide into insolvency.

Maybe interest rates can become even more negative, and banks can become even less liquid.

But one day that confidence will turn. And as this month shows, it can all happen in an instant.

Look, I’m an optimistic guy.

Crisis always brings opportunity for those who can see the obvious realities. And I think what’s starting to unfold is tremendously exciting.

Economics isn’t complicated. The Universal Law of Prosperity is very simple: produce more than you consume.

Governments, corporations, and individuals all have to abide by it. Those who do will thrive. Those who don’t will fail, sooner or later.

When the entire financial system ignores this fundamental rule however, it puts us all at risk. …
 

 
Simon Black
Founder, SovereignMan.com

Meet the bureaucrat who had the courage to tell the truth

Guest post by Simon Black

It’s not very often that you hear a senior government official refer to their economic situation using the word ‘crisis.’

Yet with uncharacteristic bluntness of any government official anywhere, at least one senior Chinese government official is sounding the alarm bells.

And he would know.

Guan Tao oversees the foreign exchange of China’s $4 trillion stockpile of reserves, so he has an incredibly unique view of capital flows and currency movements in and out of the country.

Currency movements and capital flows are extremely interesting indicators.

They don’t necessarily tell you that there’s a problem. They tell you that people have figured out there’s a problem.

Look at Greece, for example.

The government is bankrupt, another default is looming, and the country is literally about to run out of money. It’s pretty obvious that there’s been a problem for a very long time.

But the central bank data in Greece now shows that roughly 8% of all customer deposits have vanished from the Greek banking system so far this year.

That’s an astonishing figure.

Again, a currency movement like this doesn’t tell you that there’s a problem. All the other data can tell us that.

The currency movements out of the banking system tell us that the people of Greece have figured it out; that they’ve lost confidence in the system.

This is extremely important, because the entire global financial system is only held together by a very thin layer of confidence.

Nearly every western government is bankrupt. Central banks are borderline insolvent. Banking systems are extremely illiquid.

Everything about this system is fundamentally weak. And the only reason that people aren’t panicking is because no one else is panicking.

Like a very thin piece of glass, the tiniest chip can turn into a crack -- and ultimately shatter the confidence in this system. That’s exactly what happened in 2008.

Major currency movement and capital flows tell us that people are starting to panic.

It’s happening in Greece. And it’s happening in China.

Mr. Tao informed the audience that the capital flight from China in December alone amounted to $20 billion, and that was just from official channels. The true amount could be four times greater.

This is significant for a number of reasons:

a) It’s happening.

Tens of billions of dollars are fleeing China, which is arguably the largest economy in the world. This does not bode well at all for the global economy.

b) They’re admitting it.

Again, it’s ridiculously unusual for a senior government official, ESPECIALLY IN CHINA, to admit to an audience, “yeah, people are taking their money and getting the hell out of dodge.”

Moreover, Tao even told his audience that China’s financial conditions “looks more and more like the Asian financial crisis” of the 1990s, and that we can “sense the atmosphere of the Asian financial crisis is getting closer and closer to us.”

(Our Chief Investment Strategist said the exact same thing last year.)

Such brutal honesty is certainly welcome. But it’s akin to career suicide.

c) If people are taking their money out of China, with all of its growth and savings, what does that say about other bankrupt nations?

Europe is a complete basket case and will likely go from bad (Greece) to worse (Italy).

Japan is a terminal failure, currently spending over 25% of its tax revenue just to pay interest.

And, perhaps just due to process of elimination, everyone seems to be looking to the United States as the beacon of growth and stability right now.

I’m sorry but this just doesn’t compute.

The US Federal Reserve on a mark-to-market basis is borderline insolvent. The US Federal government actually IS insolvent (based on their own financial statements).

The US banking system is EXTREMELY illiquid and has once again loaded up on risky loan packages (more on this in another letter).

How exactly is this safe?

It’s not. In fact, it’s downright ugly. And not even less ugly than the others.

Bottom line, there are very few safe places out there. Each of the governments has royally screwed up, and at this point, they’re all interconnected.

Greece and Italy cannot fail without devastating much of Europe. Europe cannot suffer without causing problems in China. China cannot slow down without causing major problems in the rest of the world.

Everything is connected.

So it’s simply wishful (and foolish) thinking to simply presume that the US, with its $18 trillion debt level and nearly insolvent central bank, can somehow be ‘all good’ while other nations are haemorrhaging cash….

---

Simon Black is is an international investor, entrepreneur, permanent traveller, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.
This post first appeared at his website Sovereign Man.

It begins: German bank charging NEGATIVE interest to its customers

Guest post by Simon Black

Don Quixote is easily one of the most entertaining books of the Renaissance, if not all-time. And almost everyone's heard of it, even if they haven't read it.

You know the basic plot line—Alonso Quixano becomes fixated with the idea of chivalry and sets out to single-handedly resurrect knighthood.

His wanderings take him far across the land where he gets involved in comic adventures that are terribly inconvenient for the other characters.

He famously assaults a group of windmills, believing that they are cruel giants. He attacks a group of clergy, believing that they are holding an innocent woman captive.

All of this is based on Don Quixote's completely delusional view of the world. And everyone else pays the price for it.

Miguel de Cervantes' novel is brilliantly entertaining. But the modern-day monetary equivalent is not so much.

Central bankers today have an equally delusional view of the world. Just three months ago, Mario Draghi (President of the European Central Bank) embarked on his own Quixotic folly by taking certain interest rates into NEGATIVE territory.

Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote, everyone else has had to pay the price for his delusions.

On November 1st, the first European bank has passed along these negative interest rates to its retail customers.

So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year... to the bank.