“I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all.

Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers.

As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.

Chart of U.S. national debt holders, domestic and foreign

Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.
Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases — trade surpluses — has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase.
While foreigners are continuing to show up for the record-sized Treasury auctions, it’s due to the dollar retaining its status (albeit shakily) as the world’s reserve currency. But they have become quite cautious, generally investing towards the front end of the yield curve, which is a vote of no confidence in the buck’s future. As the chart below illustrates, sales of long-term bonds to foreigners are way down.

Treasury bond sales graph

So what does all this mean?

It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over — and the unwinding process has just begun.

Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.

Projected U.S. Debt

As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on “auto-pilot” and quickly headed to the point where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.
The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.
The editors of The Casey Report have been alerting subscribers to this very possible scenario for quite some time. If foreigners stop buying U.S. government debt, the whole house of cards will come crashing down. But you can do a lot to protect yourself financially – run with the trend instead of swimming against it. Find out more about the accurate predictions of trend hunter Doug Casey and his team, and how to profit from them . . . click here.

Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system.

When Social Security was founded, the typical US worker at age 65 could expect to live another 11.9 years. But if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full benefits and tomorrow’s workers even longer.

In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. “When an entire society ages,” suggest Arnott and Casscells, “…the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a ” hidden debt ” far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode.

The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level.

And to the retiring boomers’ other doubts and insecurities, we might add that US health care costs are expected to rise by 7 percent of GDP over the next 40 years – a rate that is more than twice as fast as other developing nations. The “old old,” – those aged 80 and over – are predicted to rise sharply through 2050 and will dramatically increase long – term care costs as well as disability, dependence, and health care expenses.

In fact, by official projections, in 2030, the US government will be spending more on nursing homes than it spends on Social Security today. “Although people justifiably worry about Social Security,” says Victor Fuchs, an economist who studies the health care industry, “paying for old folks’ health care is the real 800-pound gorilla facing the US economy.” Adding projections for Medicare and Medicaid ’s expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes.

The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic’s Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You’re encouraged to delve into the numbers we presented in the film and book. They’re truly mindboggling. But in many ways the project was dated the moment we released it to the public.

The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017 – two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. Medicare would have to deposit $ 13.4 trillion – $ 1 trillion higher than last year’s estimate – into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers’ earnings or the economy as a whole.

Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded.

For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties – indeed, because of the difficulties – it is essential that action be taken soon, particularly to control health care costs.

After the revised Social Security and Medicare announcement the world began to wonder: Can the US hold onto its AAA credit rating?

“The US government has had a triple-A credit rating since 1917,” David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, ” but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation ‘ s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”

Of course, we must note that the whole credit rating biz is…well…corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch, and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage – backed securities get a AAA…housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too.

But even Moody’s is starting to hedge their bets. They’ve since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable…a corporate way of saying the good, the bad, and the ugly. While the United States isn’t in the worst of the bunch, it’s certainly not the best.

Source: Social Security? Not Exactly

The first public retirement pension scheme was created by Otto von Bismarck in 1880 Germany. Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States. As we’ve seen, the number of people expected to reach the retirement age of 65 was not considered to pose a threat to future funding. Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system.

When Social Security was founded, the typical U.S. worker at age 65 could expect to live another 11.9 years. But if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full benefits and tomorrow’s workers even longer.

In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. “When an entire society ages,” suggest Arnott and Casscells, “…the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a “ hidden debt ” far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. 21 And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode.

The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level.

A Bubble in Health Care

And to the retiring boomers’ other doubts and insecurities, we might add that U.S. health care costs are expected to rise by 7 percent of GDP over the next 40 years—a rate that is more than twice as fast as other developing nations. The “old old,”—those aged 80 and over—are predicted to rise sharply through 2050 and will dramatically increase long – term care costs as well as disability, dependence, and health care expenses.

In fact, by official projections, in 2030, the U.S. government will be spending more on nursing homes than it spends on Social Security today. “Although people justifiably worry about Social Security,” says Victor Fuchs, an economist who studies the health care industry, “paying for old folks’ health care is the real 800-pound gorilla facing the U.S. economy.” 23 Adding projections for Medicare and Medicaid ’s expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes.

The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic’s Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You’re encouraged to delve into the numbers we presented in the film and book. They’re truly mindboggling. But in many ways the project was dated the moment we released it to the public.

The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017—two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. 25 Medicare would have to deposit $ 13.4 trillion—$ 1 trillion higher than last year’s estimate—into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers’earnings or the economy as a whole.

Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded.

For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties—indeed, because of the difficulties—it is essential that action be taken soon, particularly to control health care costs.

After the revised Social Security and Medicare announcement the world began to wonder: Can the U.S. hold onto its AAA credit rating?

“The U.S. government has had a triple-A credit rating since 1917,” David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, “ but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation ’ s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”

Of course, we must note that the whole credit rating biz is…well…corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S & P, Fitch, and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage – backed securities get a AAA…housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too.

But even Moody’s is starting to hedge their bets. They’ve since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable…a corporate way of saying the good, the bad, and the ugly. While the United States isn’t in the worst of the bunch, it’s certainly not the best.

Regards,
Bill Bonner and Addison Wiggin

Source: Excerpt from ‘The Hard Math of Demography’

The 30-year Treasury is now at its highest level since last November. The rise in bond yields has raised questions about whether the Federal Reserve will step up efforts – which began in March – to keep yields down through direct purchases of government bonds.

Tom Porcelli, economist for RBC Capital Markets, described it as a “terrible auction.”

Why is this bad news? Because such poor demand in the face of America’s requirement for record amounts of public debt will make it very difficult for the Fed to keep interest rates low.

You see, politicians pretend that there are few adverse consequences to their worsening debt addiction. And since the collapse of the debt bubble in 2007, they have been putting Americans in hock like it was going out of fashion.

Of course, all of this borrowing has very real consequences for Americans. As investor confidence and risk appetite return and US equities rally, investors are turning their backs on the low-yielding US bond market. As investors shun US treasuries, interest rates move higher to lure investors back into the market. This rise in treasury rates puts pressure on interest rates everywhere – from homes to cars to the interest corporations must pay on any new bonds they issue. Mark our words, higher interest rates in this market will just wind up choking off any real recovery.

The very real consequence of the rising long-bond yields can be seen in the recent rise in mortgage rates. This, again, from the FT:

Mortgage rates have been following the government bond yields higher. A 30-year fixed-rate mortgage averaged 4.84 per cent last week, according to a Freddie Mac survey, compared with 4.78 per cent the week before.

As underground investor Tom Dyson (who edits the excellent 12% Letter ), a rise in the long bond’s interest rate can crush certain income investments.

If the long bond’s yield rises from 4% to 8%, the yield on all other income investments must also rise by 4%. A 12% junk bond would become a 16% junk bond. A 14% dividend payer would have to become an 18% dividend payer.

As Tom says, the long-bond market is “weaker than a wet paper bag” right now. He reckons the magic number for shorting long bonds is 124.07. And the long bond closed at 123.26 on April 28 and is now making new five-month lows.

Here at Notes we smell opportunity. We have our eye on the ProShares UltraShort 20+ Year Trea ETF (NYSE:TBT) . This ETF has risen over 6% in the last five weeks or so.

After five straight days of losses, Wall Street managed to steady itself yesterday. The Dow rose only 12 measly points; but that was a relief for most investors.

Oil held steady too – at $35. And gold lost a dollar, to drop to $807.

The big question is a question of faith. How much faith do you have in the feds? They aim to get inflation fired up. They’ve got the fire-starters. They’ve got the matches. They’ve doused on the gasoline. But so far, the whole world economy is still waiting…shivering…hoping for a spark.

Yesterday, Congress released another $350 billion in bailout funds. And Barack Obama and the democrats announced their own bailout/stimulus program – with an $825 billion price tag.

Christmas is over…but the Obama plan is keeping spirits bright around the capitol. Never in history have the feds had so much in money to share out…money they haven’t even stolen yet.

The program includes “huge increases in federal spending on education, aid to states for Medicaid costs, temporary increases in unemployment benefits and a vast array of public works project to create jobs,” reports the International Herald Tribune.

In Europe, the ECB cut rates. The IHT reports on that to

“Alarmed by the rapid economic downturn, the European Central Bank on Thursday lowered its benchmark interest rate by half a point to 2%, and hinted that the rate would fall further from what is already the lowest level ever.”

“The data surprised everybody about how negative it turned out…” said an economist watching the ECB.

But will all this extra kindling be enough to get a blaze going? How much faith do you have, dear reader?

“Economic conditions around the world are horrible and will get far worse in 2009 despite all the fiscal and monetary measures that are now being implemented in order to ’save’ the system,” writes old friend Marc Faber. “In fact, I believe that in the US and stimulus package and the various bailouts engineered by the Fed and the Treasury will make matters far worse than if the free markets had been left alone to make the necessary adjustments.”

The feds might manage to get a blaze going, but it won’t necessarily be the nice little, crackling fireplace treasure they’re hoping for. The system of debt-addled investors and homeowners is over. All the feds can do is to blow up a new bubble – in public debt.

What effect that will have on the economy…or on investment markets…no one knows. Never before has the world’s reserve currency been purely paper. And never before have its custodians been so eager to set it alight.

*** What’s normal?

Looking at the long sweep of the stock market, we notice that there’s nothing unusual about today’s prices. Au contraire, they are more ‘normal’ than prices were a year ago.

Colleague Simone Wapler handed us a chart of the French stock market going back to 1900. With prices adjusted for inflation, what we see looks like the Alps. There are peaks and valleys. The pattern is irregular…apparently unpredictable. But there’s no mountain with only one side. Every time prices went up…they went back down.

The CAC 40 rose during the boom years of the ’20s…and crashing during the ’30s. Curiously, it rose to a new peak during the German Occupation in the ’40s and fell in the ’50s. The next peak came in the de Gaulle years, in the early ’60s. Then, price fell for the next 20 years. As in the United States, the most recent bull market began in ‘82 and collapsed last year. But even after the recent rout in share prices, stocks in France are only back to their average levels. The numbers show that an investor who bought shares in 1900 could have held them for the next 108 years and still not have made a penny in capital gains.

Normally, you do not make money from rising share prices. You make money from dividends.

*** Simone used to be an aeronautical engineer; she worked on the development of the Airbus – the plane that just went down in the Hudson River.

“It’s safer for them to do a crash landing on water,” she explained. “Less of a risk of fire. And it takes a while for them to sink…so you have time to get out.

“When you land or take off, there is always the risk of birds getting in your engines. When I was at Airbus, we conducted extensive tests…in which we threw chickens into the turbine engines to see how many they could take. They had to be free-range chickens…the others are too soft. Trouble with birds is that they tend to flock together… but I don’t remember how many chickens an Airbus turbine can handle before it stalls.”

*** “Ford chief doubts a return to old times,” says the Financial Times.

This week, the annual Detroit Auto show is underway. America’s automakers are sitting at the wheels of their new electric/hybrid cars…and driving into the future.

It used to be said, “What was good for GM (NYSE:GM)hat is bad for GM is also bad for America.

We have vowed to focus on the bright side this year, so we will look at the half of this glass that has the water in it. There, we find an explosion of invention and innovation in the auto business.

Detroit dominated the auto world after WWII with a simple idea about what a car should be – a piston engine attached to a standard drive train. For the next 50 years, the basic plan didn’t change very much. Detroit designers added tail fins…and then withdrew them. Engineers figured out automatic transmissions, power steering and air-conditioning. The French added radial tires and front wheel drive. But neither the car not the business model was substantially altered.

But all of a sudden, America’s big automakers are going broke – and neither the auto business nor the auto is the same. Now, autos are being made with new materials…new engineering and a new power plant. Now, the key to the auto of the future is no longer the internal combustion engine; according to the press, it’s the battery.

This is what happens to any business…or any society. Detroit can make big SUVS, trucks and cars – all based on the post-war model. But what does it know about composite materials and batteries? Not that it is impossible for it to compete. But it has a huge disadvantage – while newer, lower-cost competitors start fresh and fit…Detroit enters the race with a 2-ton piece of junk on its back. It has generations of mechanical engineers for whom it must provide pensions…an army of bolt tighteners and metalworkers it must rehabilitate…acres full of manufacturing equipment suitable for making 20th century cars and trucks.

Meanwhile, a company in China is producing an electric car that it says will go 250 miles without a recharge. The company is not an automaker at all – it’s a company that makes batteries for cell phones.

Yes, dear reader, that’s the way the world works. Just when you get something figured out, the facts change. Then, you find yourself no longer at the front of the race…but dragging along at the end. All that you learned and put in place is no longer an advantage, it’s a liability.

And yes, as Detroit goes…so goes the United States of America. Cock of the walk in the 20th century, it now finds its infrastructure…its financing…and its training all inadequate or inappropriate for the challenges of the 21st century.

When Ben Bernanke gave his speech to the London School of Economics on Tuesday, our reporter was on the scene. Terry Easton put a tough question to America’s central banker: aren’t your interventions just making the situation worse, he wanted to know.

Amid the blah…blah…blah…of Bernanke’s response was this:

“The tendency of financial systems to boom and bust …is a very long-standing problem… but I think it’s very important for us to try to put out the fire…then you think about the fire code.”

In his 1988 book, The Collapse of Complex Societies, Joseph Tainter argued that all societies – like all organisms – are doomed. Tainter studied ancient Rome as well as the Mayan civilization. He noticed that problems always blaze up. Each one – whether climatic, political or economic – rings the firehall bell. And each solution – and readers may substitute the word “bailout” for solution – brings more challenges and takes more resources. Finally, the available resources are worn out.

Tainter observes that when the costs become high enough, people seem to give up. By the end of Roman era, for example, the burdens of empire were so heavy that people sold themselves into slavery to get free of them. So many people did so at one point that the authorities had to come up with another solution; they outlawed the practice. Henceforth, Roman citizens were required by law to remain free!

Another philosopher, Giambattista Vico, writing in the 18th century, put the beginning of the decline of Rome roughly at the time of the Great Fire during Nero’s reign. Nero, partly to pay for his post-fire reforms and reconstruction, began taking the gold and silver out of the coins. All civilizations go through three stages, Vico said – divine, heroic, and human. The divine period is ruled by the gods. The heroic period is adorned with victories and statues. Then, comes the human era. (Here, we permit ourselves to add a footnote to Vico’s oeuvre: the coin of the realm in early periods is the gods’ money – gold. Later, people switch to money of their own invention – the kind of money you make from trees.) This last stage, says Vico, is when popular democracy arises, along with rational thinking and what Vico delightfully calls the “barbarie della reflessione” [the barbarism of reflection]. In earlier eras, people do what their gods and leaders ask of them. In the final era, they ask, “what’s in it for me?”

Even as late as the early ’60s, John F. Kennedy could still appeal to heroic urge without drawing a laugh. “Ask not what your country can do for you,” he said in his inaugural address, “ask what you can do for your country.”

But 11 years later, Richard Nixon, like Nero before him, began the process of debasing the country’s money. That was a solution too; the United States had spent too much. Nixon could worry about the fire code later. First he opened up with the fire hose; he defaulted on America’s promise to exchange dollars for gold at the statutory rate.

Barack Obama tried a Kennedyesque appeal to civic high-mindedness last week. We need to “insist that the first question each of us asks isn’t ‘what’s good for me’ but ‘what’s good for the country my children will inherit,’” said the president-elect. But now, like Doric columns in a trailer park, the words are ornamental, not structural. They are the homage that one age pays to a better one.

We are in the 21st century now. Barbarous reflections rise up like swamp gas. The whole place stinks of them. Bernanke and Obama offer solutions. But their plans to save the world from a correction are little more than a swindle. They offer to bail out the mistakes of one generation with trillions of dollars’ worth of debt laid onto the next.

“Regarding the current financial meltdown,” writes Rony Teitelbaum, “it is very clear that two main factors underlie the political reactions to the crisis, the first being pressure originating from ties between the financial and the political elect, manifested by taxpayer bailouts of large institutions that continue to deliver bonuses to the executives and donate to political campaigns. For those of us who are not blind, these are clear signs of political corruption which would have made the worst Roman emperor blush. The second factor is political pressure originating from the mass public. The kind of solutions offered so far, and I may add which were received with very warm enthusiasm, were tax rebates and gasoline tax holidays. These are actions aimed at a public who “impatiently expected quick and obvious results,” to quote Cary’s description of Roman society in AD300. (A History of Rome).”

Circa 2009, there is hardly a soul in the entire world who has not been corrupted by the barbarie della reflessione of the late imperial period. Both patricians and plebes are for bailouts. Both business and labor back stimulus programs. The taxpayers and the politicians who rule them are of one mind. Liberal, conservative, rich, poor, Republican, Democrat all speak with a single voice: ‘Screw the next generation!”

The golden age is over, in other words. In the space of 40 years it passed from gold, to silver, to paper…and is now somewhere between plastic and navel lint.

Source: The Lint Age

But US investors shrugged off the employment news. The rally continued…it has gone on for a month. The Dow rose again yesterday; this time it was up 298 points to 8,934. If the rally retraces 50% of the losses, it will make it all the way to 11,000. So, this trend probably has a way to go.

Oil rose too – back up to $43. And gold shot up $17 to $769.

Commodities, stocks, precious metals – almost everything was up yesterday.

One important exception: treasury bonds. The yield on ten-year T-notes rose to 2.76%…leading Bloomberg to report:

“Treasuries fall as US to sell more securities than expected.”

Watch those Treasury yields. Along with the dollar they are going to tell the tale of the NEXT big bubble – the LAST big bubble of the whole Bubble Epoque – a bubble in public debt.

All over the world, the feds are desperately trying to inflate their currencies. People want money. People need money. And they need to spend money.

From the US this morning comes news that a record one in ten homeowners is either in arrears on his mortgage or already in foreclosure. And everyday brings more dudes without paychecks. With no savings…and no jobs…people are squeezed hard. They can’t spend; they can’t even keep up with their mortgage payments.

So, the simpleton feds are giving people more cash and credit.

As everyone knows, what got them in trouble in the boom years was spending and borrowing. So what do the feds do? They borrow and spend more! Altogether, they’re putting up more than $10 trillion to try to reflate the world economy.

Where do they get that kind of money? First, they borrow it. Then, they print it. So far, borrowing has been easy. Because, while asset prices are falling, investors lend to government in order to protect their money. And with consumers not spending, prices fall – so there is no consumer price inflation to worry about.

In fact, food and energy – key components of consumer prices, though not of the core CPI – are actually falling. And when prices fall, consumers have an incentive NOT to spend, because they will be able to get what they want at lower prices in the future. That’s when a recession gets to be serious; it’s what happened in Japan. And there’s not much the feds can do about it, because they can’t push their lending rates below zero. So, the feds are sweating deflation – not inflation. They want to avoid it in the worst possible way.

What’s the worst possible way to avoid deflation? Print money. ‘Governments can always avoid deflation,’ says Ben Bernanke — but only if they’re reckless enough to risk runaway inflation. ‘And you can really make a mess of things,’ Gideon Gono might add, if he had any idea of what he was doing to Zimbabwe.

And it can happen suddenly. There are huge piles of cash – in T-bills, in money-market funds, in foreign central vaults waiting out the crisis. At present, the owners of this cash are more worried about deflation than inflation. But at some point – maybe in 2009…probably in 2010 – that will change. Borrowing and lending money will prove ineffective. Real inflation – otherwise known as the kind of money that comes from trees – will be the only option left. Eventually, the feds will get the hang of it…inflation will soar…investors will dump dollars and T-bonds…and the last bubble, in government debt, will blow up.

*** Our world tour continues. We’ve left the smells of Mumbai – spice, sweat and smoke – for the clean comforts of Melbourne, Australia.

But everywhere we go, there we are. We carry our doom and gloom with us, along with our toothbrush.

“Australia is no different,” says a colleague. “People lent money too freely and spent it too readily. House prices soared. Debt went a little crazy. But Australia is more like South Africa than like India. It’s a resource economy…so we went bust later…when the commodity bubble blew up. And when we went bust, we went bust hard. These commodity producers are down even more than the Nasdaq or the Dow. And now unemployment is rising. It was as high as 15% in the early ‘90s, the last time there was a slump in Oz.”

But don’t worry, dear reader. The feds “Down Under” are taking action. They’ve promised to send out a check – to qualifying parents – for $1,000 per child. Senior citizens will get $1,400.

Why the giveaways? Don’t be so thick, dear reader; it’s the worldwide financial crisis. The feds can get away with anything.

Sending out checks is a simple way of “reliquifying” the economy. Especially if you send the checks to poor people. They spend the money.

“TVs and hookers,” says Dan Denning. “They’re both bound to go up…”

Sending money to people probably works better than bailing out Wall Street. If what you’re trying to do is to encourage people to spend, the best thing to do is to put as much money in as many hands as possible. If the government wanted, it could send everyone a $10,000 check…or even a $100,000 check. Of course, the bigger the check, the more obvious the scam.

Nobody bothers to think about it – especially not in a crisis – but if they spared a minute to reflect on it, they would notice that it is nothing more than fraud and grand larceny. In order to put money in some people’s hands, they have to take it out of other people’s pockets. Or, just print it up. Either way, resources are stolen and redistributed. The rightful owners of the money get less of what they wanted. The beneficiaries – whether they are Wall Street’s insiders…or single mothers in the Outback – get more.

*** Sign of the time: a headline on the web this morning: “How to look gorgeous – on the cheap!”

Source: Hey Dude, Where’s My Job?

But now the idea that the good times are over is going mainstream: not only is the “nice” decade – Non Inflationary Consistently Expansionary – ending, but the “nasty” one could well be starting, says analyst Tim Bond of Barclays Capital.

But what does that really mean? And how will Britain be dragged down into another recession?

Over to the strategy team at Legal and General. They’ve charted a ‘heat map’ of factors that could push us over the cliff edge. And it’s enough to get anyone steamed up…

…Legal and General’s SatNav is now on red alert. According the them there’s now a 95% chance that Britain is heading for recession!

While you’ll find plenty of commentators who will happily chat in gloomy terms about all sorts of possible problems, and then make a comparison with some point in history, Legal & General has taken the analysis a stage further.

Having totted up all the potential perils facing UK plc, the L&G team then rated each risk on a scale between ‘Good’ to ‘Danger’. Everything in the latter category, you won’t be surprised to hear, is coloured bright red on the heat map.

Why the likelihood of a recession is so high

So after examining sky-high personal debt levels, soaring oil prices, crimped bank lending and tension in the money markets, as well as a few other areas of possible pain, the strategists reckon that the odds of Britain suffering a recession are now about 95%. And what raises the stakes so high is the likelihood that everything will go wrong at exactly the same time. Which also makes it a racing certainty that the recession will prove to be just as bad as both the early 1990s and early 1980s.

How long will it last? The official description of recession by economists is “two quarters of negative growth” (only economists could actually talk about minus numbers as negative growth).

The Legal eagles have been pretty downbeat for some while, but until now have been telling us to expect perhaps two years of the economy going nowhere.

But recently the L&G ‘recession model’ has taken a real turn for the worse, and is now warning of a long decline in economic activity, by as much as 2% year-on-year. That may not sound huge, but if it happens, life could get very unpleasant and we’ll all feel the squeeze.

Cheap Asian imports are getting more expensive

Already there’s lots of talk about the dangers of Asian inflation and what this means for us here in the UK. Instead of picking up all those nice cheap Far East-made goods on our credit cards, we’ll soon find that the prices have gone up quite a lot (see this week’s Moneyweek for more on this).

But in future, the Legal analysts suggest that little luxuries will soon be off the menu anyway. If we do have a little leeway before hitting our credit limits, we could soon need it, plus any spare cash we can lay our hands on, just to pay the petrol bill to get to the supermarket.

Spending in the shops will suffer, profits in consumer businesses will slump and jobs will get cut. Meanwhile, the housing market will get much worse as mortgage problems mount. The Council of Mortgage Lenders now sees house prices dropping 7% this year, with transactions down by over a third on last year.

And banks will become less and less willing to lend money to all those people who’ll need it more and more. Don’t believe we can’t have a recession at this level of interest rates. If the banks close the loan shutters, we can.

Why the Bank of England is a lot gloomier than the Government

It seems the Bank of England is finally catching on, too. Today’s FT reports that the Threadneedle Street thinkers are now a lot more gloomy than official Government forecasts. Indeed, the Bank now believes that “a long period of weakness” is needed to bring inflation under the thumb, as I talk about below.

What’s more, the Government, i.e. taxpayers like you and me, won’t be able to do much about helping out, now that Gordon Brown has broken his Golden Rule by reeling in Northern Wreck.

UK public debts have now smashed through the government’s official ceiling of 40%, preliminary figures suggest, reaching 43.1% of gross domestic product (GDP) in March. And although Chancellor Alistair Darling has said that any impact on the public finances by nationalising Northern Rock would be “temporary and exceptional”, just remember Milton Friedman’s comment that “there’s nothing so permanent as a temporary government programme.”

Historically, governments have been able to use our cash to boost the economy. But Howard Archer, chief UK economist at Global Insight, said the government’s aim to keep borrowing down to £43 billion in the current financial year is “wishful thinking” should the economy slow sharply.

And because of inflation, the Bank of England won’t be able to help either. The hands of the rate setters on the Bank’s Monetary Policy Committee (MPC) are well and truly tied by the CPI (consumer price index) hitting 3% and looking like it’s going some way higher, rather than lower.

In short, there should be no more interest rate cuts on the MPC’s agenda for the moment. Not that they were doing much good anyway. What matters most to the majority of homeowners is the level of mortgage rates. These are priced off so-called swap rates, in turn based on LIBOR – the interbank rate at which lenders lend to each other. Libor rates have stayed stubbornly high, the best part of 1% above base rates, despite the MPC’s earlier antics.

This may all sound like a technicality, but it isn’t. What it’s saying is that there’s still a lot of nervousness left in the banking system. Mortgage variable rates won’t fall until the markets regain confidence in the Bank’s bank rate.

So the picture’s looking bleak on all fronts. Recession looms, consumer prices soar, public debt climbs. Not nice at all.

Source: Why There’s a 95% Chance of a Recession