Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
China Takes the Long View on Gold-Silver... and So Should You - 25th Apr 18
Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves - 24th Apr 18
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UK Gambling Statistics - What the Numbers Say - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

The Federal Debt Default Tornado Is Coming, Prepare Your Storm Shelter

Interest-Rates / US Debt May 18, 2011 - 07:10 AM GMT

By: Gary_North

Interest-Rates

Diamond Rated - Best Financial Markets Analysis ArticleSometimes we need a hole to crawl into.

I recently spoke at a conference sponsored by a small rural church in Alabama. Several of the families had been in the path of one of the tornadoes that swept through the state. One of the families had a storm shelter/basement. Several nearby families did not. So, they ran for the house of the family that did.


When they all emerged, the house above them was gone. Yet the houses of the other families were still standing.

The family with the shelter has nine children. Their shelter had provided a safety zone for other families. Yet, after the tornado had moved on, the family with the shelter turned out to be the primary victim.

Another family in a different part of the county was also hit by a tornado. The family had 13 children. They had no storm shelter. The walls of the house collapsed. The father was lying on top of a child. Some of the falling debris killed him. No one else died.

The church immediately set up a fund for the victims. The members pulled together. They did not seek FEMA aid.

One of the members wants to build a new home across the street from the church. The property has a high water table. It is not feasible to construct a basement shelter. So, he will have a safety room constructed, one reinforced with re-bar.

We take precautions, but we cannot know how events will sort out winners from losers, survivors from the dead. The best we can do is to recognize that disasters can hit, and that precautions taken in advance are wise. Precautions can reduce the impact of disasters, but they cannot prevent them.

When we see a crisis coming, we spend extra money to make preparations. We reallocate our budgets. The more likely the crisis and the more devastating its results, the more we should allocate.

This strategy is not what the U.S. government adopts. It spends enormous sums on preparing for crises that are unlikely to occur. Think of our fleet of aircraft carriers. What nation is likely to go to war with us by means of aircraft carriers?

Our problem today is that the most obvious source of a major crisis today is the debt structure of Western governments, central banks, and commercial banks. Because governments are the problem, there will not be a solution provided by politicians. The same is true of central banks.

There comes a time to start looking for a storm shelter.

DUCK AND COVER

When I grew up in Southern California in the 1950s, public elementary schools had an occasional drill for an atomic attack. It was called duck and cover. The drills would have been useless in an atomic attack. First, the infrastructure of society would have been blown away: power lines, highways, food-delivery systems, water lines. Second, the vertical protection of a school desk would have done little to protect us against the horizontal destruction of imploding windows. Glass shards would have sliced through us like knives.

Rather than construct a blast shelter system, the government spent $13,000 on a civil defense film, "Duck and Cover," starring Bert the Turtle. I have posted it here.

This film is a symbol of crisis and response management at the Federal level. The government sees a crisis coming and, rather than dealing with it in the early stages, when something might actually forestall it, resorts to public relations. It talks about the crisis. It appoints committees to write reports on it. There may even be a task force created to solve it. A task force is a committee filled with nationally respected figures, who hire a staff, meet a few times, and issues a report. No one pays any attention. No one is expected to pay any attention. All of this is a kind of kabuki dance.

Only when a threat is manufactured by the government as a way to create a massive new bureaucratic structure does Congress implement expensive solutions. If the public does not respond to the announced crisis by way of support for major expenditures, the crisis gets shelved.

A disaster drill is a substitute for solving the problem. As long as the voters will accept the drill as a legitimate substitute for a solution, the drills will continue.

AN ANNUAL DISASTER DRILL

The worst crisis from the government's point of view is the national debt crisis. It leads to calls for reduced government spending. For this crisis, the government has this well-orchestrated response:

1. An admission that it is real, but not imminent
2. A promise to deal with it later
3. A call to spend more now to spend less later
4. Kabuki theater

This week, the issue of the U.S. government's debt ceiling comes up for discussion in Congress. The Secretary of the Treasury has offered a dire forecast. There will be a double-dip recession unless Congress votes to raise the debt ceiling once again. Congress does this every year, but this year there is pressure from new House members not to raise the ceiling. Meanwhile, the government is in the middle of a $1.65 trillion on-budget deficit. Like a tornado, the deficit will hit the political will of Congress. There is no basement storm shelter. There is no safe room.

Congress's will to resist will be flattened, as it is every year. Usually, this vote has been pro forma. The media may mention it, but not as a prime-time story. It is always assumed that Congress will rubber stamp the proposed increase, in order to avoid a partial shutdown of the government – maybe 10% of operations. For Congress, this is regarded as a level-5 tornado, not a squall.

The debt limit will be reached this week. Geithner says that he can juggle accounts until August, but at that point, the government will have to default – the big D.

Speaker of the House Boehner has said that there will be a hike in the debt ceiling, but it will be a very special kind of increase. He said on the CBS Sunday morning news show, "Face the Nation," that "we're going to do it in a way that addresses America's long-term fiscal challenges." (Whenever I see a reference to "Face the Nation," I think of the "Grin and Bear It" cartoon strip, which frequently has Senator Snort appearing on "Faze the Nation.")

In a previously recorded segment of the show, President Obama invoked what has become a familiar refrain: the recurrence of the 2008 crisis. If investors ever "thought the full faith and credit of the U.S. was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system. We could have a worse recession than we've already had."

Of course, neither Boehner nor Obama mentioned the possibility of cutting Federal spending in order to balance the budget this year and thereby avoid having to raise the debt ceiling ever again. Such a strategy is too radical. The proposed official solution is to raise the ceiling again, and to promise that this will not always be necessary, because economic growth will raise tax revenues One of These Days, Real Soon Now. The budget will be balanced. The recession will not arrive. They promise.

This year is different. The discussion is front-page, prime-time news. This is because a handful of first-term Congressional Republicans in the House are making noises about cutting spending in order to reduce the size of the increase. They don't have the votes, as we will see. These Congressmen say publicly that they see what is economically necessary, but economics has little influence in Congress. The majority of the members think they can kick the can down the road for another year. In 2012, they will all campaign on responsible spending. The operational definition of "responsible spending" never changes: "kick the can again."

DEFAULT IS COMING

In his interview in front of an audience, President Obama warned about the consequences of a default by the U.S. government. It could unravel the worldwide economic recovery. You can see the video here.

He is correct. If the Federal government ever stops paying interest on its debt, the repercussions in the financial markets would be severe. It would be worse than the crisis in the fall of 2008.

The problem we face is this: with every increase in the Federal debt ceiling, the likelihood of default increases. The politicians' solution to the threat of default is to delay the default.

The government is trapped. It really does face the prospects of default if the debt ceiling is not raised. The alternative is to cut spending drastically before August. But that would be a form of default. Certain groups that have been promised largesse from the Federal government would find that the promises were not binding.

The problem is now selective default. The Congress and the White House always agree to defer any form of default. This is why we can be sure that selective default is inevitable. The deficit numbers do not allow the government to escape the increase in the debt ceiling.

We know from decades of experience that selective defaults are not politically acceptable. So, the deficit keeps growing. The debt ceiling keeps getting raised. This is done in the name of default-avoidance.

The battle over the debt ceiling is a sham. If Congress cannot legislate spending cuts that will balance the budget, then there is no possibility that it will put a cap on total expenditures by means of a debt ceiling. There was no significant reduction in the deficit earlier this year. The deficit in fact rose compared to last year's forecast.

This is why the debate over the deficit is American kabuki theater. It is a way to score debate points for next year's elections. Candidates will be looking for published statements of incumbents' opinion on the debt ceiling. Everyone in Congress wants to position himself or herself as taking the responsible path to national prosperity.

The problem they face is this: to cut the deficit specifically is to alienate voting blocs that are dependent on transfer payments from the Federal government. They refuse to make specific cuts for this reason.

Each political party is more afraid of the alienation of specific voting blocs than it is with the general threat of the debt ceiling as a political issue. So, they do not specify what must be cut. Therefore, nothing will be cut.

An interviewer who wants to sink a candidate asks him to identify what programs he recommends cutting. The candidate mumbles.

Boehner said that everything should be on the table except raising taxes. This plays well to conservative voters. But where is this table? Whenever the debate over the annual budget gets laid on the table, the specific cuts are not made.

Boehner said we must now look at "the big picture." Indeed, we should. But Congress never does. Congressmen look at the small picture: the swing voters in their districts. These voters can usually make or break a re-election campaign. So, the Congressman seeks to retain the swing voters who elected him two years earlier while not losing his core constituency. He does not want voters to defect to his rival. So, he dares not propose specific cuts. Specific cuts alienate specific swing voters.

He said that Congress must not kick the can. But he announced that it must kick the can on the debt ceiling this time. When a politician says that Congress must not kick the can, but then says it must kick the can this time, so that it won't have to kick it next time, he is saying that Congress will kick the can.

This never changes. Politicians can call for deficit cuts in general. But there are never cuts in general. There are only cuts in particular. These do not get made.

YOUR FAMILY'S STORM SHELTER

A tornado is like specific budget cuts. No one knows in advance whose house will be blown away.

Some families buy houses with storm shelters. But hardly anyone ever builds a home.

Most families are barely getting buy. They spend as much as they bring in after taxes and mortgage. They do not make specific cuts in spending deep enough to build up a reserve.

So, they do not prepare storm shelters. They kick the can. They imitate Congress.

Do you need gold coins? Yes. Do you need a back-up plan if you lose your job? Yes. Do you need a network of people who might be able to find you a job? Yes. Do you need a side business? Probably. Do you need skills that can be transferred to a new line of work? Yes. Do you need a plan to make sure you stay on the short list of "must not fire"? Yes.

Are you actively building your financial storm shelter?

CONCLUSION

Congressmen talk about the need to reduce the deficit. Talk is cheap.

Voters talk about the need to clean house in Congress. But it never happens. Remember Arnold Schwarzenegger and his broom? He has departed. I don't know where the broom is. The fiscal Augean stables remain.

When the tornado of selective default comes, you need to be in your storm shelter. Maybe your house will be blown away. Maybe not. But don't be inside it when you find out.

Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

http://www.lewrockwell.com

© 2011 Copyright Gary North / LewRockwell.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules