As California goes, so will the US. It is our strong suspicion here at Notes that California’s fiscal crisis (what is really a profligate spending crisis) is but a prelude to the coming national debt crisis.

Last Thursday, ratings agency Fitch dropped the Golden State’s credit rating to A-minus and immediately placed that on negative credit watch. California shares three major problems with the US. It faces:

1. A crippling budget deficit
2. Declining tax revenues
3. A legislature that won’t face up to critical issues.

Over the weekend, we read in wonder that by the non-partisan Congressional Budget Office’s own estimation America’s national debt is now growing so quickly that it will exceed the size of the economy in 2023 – seven years earlier than the projections of the last report just 18 months ago!

This from The Caucus, the politics and government blog at the New York Times:

The culprit is not the huge sum of stimulus spending that President Obama and Congress have injected into the economy this year, the budget office said. Instead, rising health care costs and an aging population together continue to push government spending upward at an unsustainable pace, only faster than the budget office last estimated. […]

“The current recession has little effect on long-term projections” of government spending and revenues, according to the budget office report, and the deficit-financed stimulus programs can “help the economy return to full employment.”

“Debt soars because of unrelenting growth in federal spending on health care programs and a rise in Social Security spending” as a share of the economy, the report said. Up to 90 percent of the increase is due to Medicare and Medicaid spending rather than Social Security, it added.

This is serious stuff. But few in the mainstream media seem to think so. Of course, the problem of too high a national debt burden is nothing new. Scottish-born, American steel magnate and philanthropist Andrew Carnegie highlighted the danger of national debts in his 1886 book Triumphant Democracy.

In Carnegie’s day, it was Europe – and particularly Russia – that suffered the most from indebtedness. Ironically, Carnegie believed that America’s democracy had saved the country from such burdens.

National debts grow troublesome. Year after year the burden they lay upon the productive energies of nations becomes harder and harder to bear. The twelve years between 1870 and 1882 have eclipsed all others in the amounts added to the already sorely burdened masses of Europe.

Russia has saddled herself with $1,365,000,000 (₤273,000,000) more debt in these short twelve years, an average increase of nearly $115,000,000 (₤23,000,000) per annum, a load fit to weigh an empire down. France’s obligations have swollen to $2,215,000,000 (₤ 443,000,000) and even Spain must be in the fashion and add $525,000,000 (₤105,000,000), and Italy, not to be behind in this mad race, has contracted $740,000,000 (₤148,000,000) more, and even poor decaying Turkey has found credulous capitalists to lend her $90,000,000 (₤18,000,000) during this period.

The aggregate of these obligations in Europe has increased, since 1848, from $14,940,000,000 (₤2,988,000,000) to $20,935,000,000 (₤4,187,000,000), and most of this increase has been consumed in wars which have left matters much as they were or would have been, if never waged. […]

Perhaps the Democracy is soon to awaken to the truth that these vast accumulations of debt have their real source in the rule of monarchs and courts, whose jealousies and dynastic ambitions, stimulated by the great military classes always created by them, produce the wars or continual preparation for wars which eat up the people’s substance and add to their burdens year after year. A nation with a large standing army and navy is bound to make wars.

Washington and its allies at the Federal Reserve are pinning their hopes for an economic ‘recovery’ on the twin policies of fiscal and monetary stimulus.

That this is more the stuff of mad science than of sound economic policy has not (yet) dented the strained optimism of the new administration. Nor does the radical nature this massive borrow-and-print operation seem to have percolated through to “Joe Public.”

Underground investors need to understand the problems involved with these so-called ‘solutions’ if they are successfully determine the economic outlook. As Doug Wakefield and Ben Hill of Best Minds, Inc. put it, “We have been brainwashed to believe that if only rates are low enough, eventually individuals and business owners will borrow money like crazy again.”

What most central planners fail to understand is the difference between policy decisions (such as the spend-and-borrow approach to economic recovery) and people’s reactions to those decisions. As Wakefield and Hill put it:

For monetary policy to be effective there must be many people in the private sector who respond to the central bank’s cuts in interest rates. In other words, there should be many people who are induced to save less, to buy a home, or to invest in plant and equipment in response to the lowering of interest rates by the central bank. It is only when the reduced savings or newly borrowed money is spent that income is generated for the next person and the economy moves forward. In other words, it is not lower interest rates per se that improve the economy, rather it is people’s reaction to lower interest rates (that is, borrowing money to spend or saving less) that improves the economy.

When the balance sheets of corporations are impaired, however, they are likely to make paying down debts their top priority. For those companies, borrowing money is the last thing on their mind. When the vast majority of the companies in an economy are in this category, however, the whole economy ceases to respond to the lowering of interest rates by the central bank.

So with the hundreds of millions the world’s leaders continue to spend in economic and financial stimulus to try to make the debt-addicted take on more debt, the answer is simple. It is wrong.

This is not an argument that goes down well with the financial wizards who manipulate the US economy supposedly in the people’s best interest. As underground investor and CEO and founder of Credit Risk Monitor, Jerry Flum, points out:

At the end of the day, here’s what they are trying to do: we’ve got the American consumer, with no savings and who has, for the most part, been wiped out in real estate – because if he has a $160,000 mortgage on a house he purchased for $200,000, but is now worth $160,000, he has very little, if any, equity left in the house. And to top it all off, his 401k and his pension and everything else is down 30 to 40 percent.

So, this consumer has no savings; his assets have shrunk, and the President of the United States, and everybody, has an economic policy which, for the most part, is trying to force banks to lend money to that consumer, so he can go out and buy another TV set or another car.

It’s ethically and morally bankrupt, and it’s an atrocious policy for our government to try to get that person to borrow more money to consume when that person should be saving. It’s insane. The fundamental policy of the government is to come in and get the banks to lend to a consumer, who represents 70 percent of the GDP, who’s nearly busted… you know, sometimes I wonder if I’m on the same planet with everybody.

In sum, there are three dangerous trends that all serious investors should come to terms with before investing a single dime in the markets (hat tip, Best Minds, Inc.).

1. Government leaders, as a whole, have become more subservient to those in control of money, resulting in ever-faster exploding debt.
2. Due to a rapid expansion of government inefficiencies and the political corruption that goes hand-in-glove with misusing perceived “unlimited power” to appease and please, rather than to lead, the economic and financial systems show more signs of instability today than they did two years ago.
3. The crowd, by and large fearing the hardship that will accompany any real remedy, desires to remain uninformed so long as their personal lives are not affected. While things looked bad in the fall of 2008, as equity prices fell around the world, the rise of the same, since that time, has comforted the crowd and lulled many back to sleep.