FedUpUSA

Archive for December 15th, 2010

Some time ago, Gonzalo Lira wrote a couple of interesting pieces on hyperinflation, and I promised to respond to them. This has taken me a while, as there is much material to go through, many arguments to pick apart, areas of agreement and disagreement, differences in definitions and matters of timing.

The first article, How Hyperinflation Will Happen, is a long, thoughtful and detailed piece that I found interesting. There are many aspects I fundamentally disagree with, however, some for reasons of substance and others for reasons of timing. 

Essentially the central proposition is that the US dollar is in danger of imminent demise due to a widespread loss of confidence, and that treasuries will be dumped en masse within a year, leading to hyperinflation, by which Mr Lira means price spikes. I do not see a loss of confidence in the dollar going forward, at least not soon. We have seen a long slide in the value of the dollar coincident with the rally in stocks. This is a reflection of a resurgence of confidence in being invested rather than being liquid, but this confidence is fragile and subject to rapid reversal. 

I regard the extremely bearish sentiment regarding the dollar specifically as typical of a bottom. Trends take time to become established as received wisdom, and by the time they come to be generally accepted, they are much closer to an end than a beginning. When everyone is bearish, and has acted upon that sentiment, who is left to carry the trend any further in that direction? Market insiders will be taking the other side of the bet, as they always do at turning points. This is how they make their money – by recognizing and feeding off the sentiment of the herd.

When the market rally tops, I expect people to begin chasing liquidity in earnest – too late for many, as liquidity will get much harder to come by. Only a small minority will be able to cash out at the top. I fully expect the dollar to surge in relation to other currencies when this happens, on a knee-jerk flight to safety into the reserve currency as the least-worst option. At that time, I would not expect the US to have difficulties selling treasuries, because I think they will be regarded as the safest option in a horribly unsafe world. This is not rational, as the US is far past the point of no return on repaying its debt, but rationality is not the point, as herding impulses are never rational.

I would also expect the purchasing power of the remaining dollars (i.e. physical cash, of which there is actually very little) to increase substantially in relation to available goods and services domestically, as dollars will be both scarce and essential once credit virtually ceases to exist. Central authorities cannot print cash to alter this situation, as this would trigger an enormous increase in the risk premium charged by the bond market. Hence, cash will remain scarce, and people will hoard what little there is, compounding the effect of deflation through a fall in the velocity of money. In this regard, my view is diametrically opposed to Mr Lira’s.

I see far more imminent problems ahead for the euro than for the US dollar. I expect the shift from optimism to pessimism, that will define the end of the stock market rally, to lead to a rapid resurgence of fear over sovereign debt default risk in Europe. This can only exacerbate the widening regional disparities, and I think it will widen them to breaking point, for the eurozone and perhaps later for the EU itself. 

As I have said before, the austerity measures coming for the whole European periphery are going to be severe enough to amount to political suicide for domestic politicians to implement. I think peripheral countries will choose to leave the euro, however high the cost of doing so, as the cost of staying in the eurozone could be even higher. If this does in fact happen, I think we would see an Argentine scenario, where savings are converted into the local currency (which would probably fall even compared with a falling euro), while debts remain in euros. These unpayable debts would then be defaulted on somewhat later. The level of uncertainty would almost certainly lead to massive capital flight from Europe, to America’s temporary benefit.

Naturally the dollar, like all fiat currencies, will eventually die, but I would argue that the time for that is not now. A dollar rally could be measured in years, although not many by any means. My best guess is that we would see perhaps a year or two of dollar rally in a world going increasingly haywire. After that I expect an end to the system of floating currencies, with all manner of attempts at competitive devaluation, currency pegs established and rapidly blown away, and beggar-thy-neighbour policies all round. The risk of currency reissue will rise over time, and be highly locational. I think the risk of reissue in the US is not imminent, but in Europe it should be a much larger concern, especially in peripheral countries.

I agree with this passage from Mr Lira’s article:

But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”. 

This has been occurring under the most favourable of circumstances – a major rally during which people are prepared to suspend disbelief and give central authorities the benefit of the doubt. In all this time, and with all its efforts, the Fed has only been able to slow deflation. Once we turn the corner, confidence (and therefore liquidity) will evaporate again, and the headwind against the Fed will get very much stronger. 

If they could not stop deflation under favourable circumstances, their odds of doing so under unfavourable ones must be extremely low. Periods of intense pessimism are not kind to central authorities. Everything they do is too little and too late. Every time they try and fail they look more desperate, which only acts to confirm people’s pessimism in a self-reinforcing spiral. Deflation has a massive psychological component, which the Fed has no tools to fight.

The second major proposition Mr Lira makes is that commodity prices will spike as a consequence of a meltdown in the treasury market:

At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008. 

It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities.

As I do not think such a treasury meltdown is imminent, I do not think such knock-on consequences are imminent either. In contrast, I think we are already seeing evidence of a top in commodities, which typically peak on fear of scarcity. I regard the sentiment indicators as strong evidence of such fear, and am therefore looking for a reversal, roughly coincident with a stock market top and a dollar bottom. 

We have already seen significant speculative gains in commodities, similar to 2008, and I think that speculation will go into reverse, probably quite sharply. I would then expect a demand collapse to carry prices further to the downside. As I see a speculative reversal followed by a demand collapse setting up a supply collapse, I can see Mr Lira’s scenario possibly playing out in the future, quite possibly coincident with a bond market dislocation as he suggests. It is difficult to predict the timing for such an event, but I see it as being much further in the future than he does.

Because of my objection to the timing, I disagree with Mr Lira’s next assertion:

People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon. 
 
If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.

When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities….[..]

…..This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.

In my view, by the time we see a commodity price spike, the value of people’s financial assets will already have evaporated, they will already have unloaded hard assets, and the dash for cash will already be in the past. I think at that point we will be well into a state of economic seizure, where credit will have disappeared, unemployment will have spiked, incomes will be very precarious, scarce cash will be being hoarded and it will be exceptionally difficult to connect buyers and sellers. Consequently, I do not see most people being in a position to engage in panic buying. 

Some many be able to do this, but I think the resource grab is more likely to be a phenomenon operating at the level of the state than at the level of the individual, as most individuals will already have lost almost all their purchasing power. In my opinion, states will certainly engage in a resource grab, and will take supplies off the market, either by sending the tanks or the bilateral contract negotiators into resource-rich regions. States know perfectly well that oil is liquid hegemonic power, and they will be trying to secure their supply in whatever way they can.

I agree with Mr Lira that almost everything will be very much less affordable than it is now, and that this will happen quickly. I do not agree that prices will rise in nominal terms, or that this is in any way a requirement of a drastic fall in affordability. I expect prices to fall in nominal terms, but for purchasing power to fall much more quickly as credit evaporates. Thus as prices fall in nominal terms, affordability decreases, and the essentials end up being the least affordable of all. They will receive relative price support as a much larger percentage of a much smaller money supply ends up chasing them, hence any fall in their prices should be much smaller than for other goods and services. Thus I agree with Mr Lira that the essentials will be drastically less affordable, but I do not think nominal prices need to rise for this to happen.

When we see the inevitable price spike in the future, once demand collapse has led to supply collapse, we could easily see price increases in nominal terms. Against a backdrop of monetary contraction, this would mean prices were going through the roof in real terms (ie adjusted for changes in the money supply). Being able to obtain essentials will be a huge problem, and I fully expect ordinary people to be priced out of the market for many things at that point. 

Their survival may then depend on rationing and bare-minimum level handouts. I think the problem will begin before this though, as a collapse in purchasing power prevents people buying essentials for lack of money long before essentials actually become scarce.

The next point of contention between my view and Mr Lira’s is his discussion of Japan’s fortunes:

That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile. 

In my view, we are looking at a Japanese scenario in some ways, but on more of an Argentine timeline. Japan has been mired in a long and drawn out deflation, because they had an enormous pile of money to burn through before having to address their banking problems and also because they had an export-oriented economy at a time when they could exploit the largest consumer boom in global history. We are not so fortunate. We find ourselves in a huge debt hole, and as the economic seizure will be global, we will not be able to export our way out of anything, even if we still had yesterday’s productive capacity, which is in any case long gone thanks to global wage arbitrage.

I do not regard Japanese sovereign debt as solid. In fact I think Japan is very close to the final day of reckoning where the problems of the past must finally be faced head on. I see a banking collapse in their near future, compounded by their extreme dependence on imported resources, which they will not be able to afford if their export markets die for lack of consumers with purchasing power.

The main point of contention I have with Mr Lira centres around the longer-term prospects for the USA:

Instead, after a spell of hyperinflation, America will end up pretty much like it is today—only with a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean out all the bad debts in the economy, the crap that the Fed and the Federal government refused to clean out when they had the chance in 2007–’09. It would break down and reset asset prices to more realistic levels—no more $12 million one-bedroom co-ops on the UES. 

And all in all, a hyperinflationist catastrophe might in the long run be better for the health of the U.S. economy and the morale of the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won’t be surprising.

I do not see this as a transitory problem leading back to business as usual, and I mean NEVER returning to what we would now regard as business as usual, let alone doing so in only a couple of years. 

Deflation and depression are mutually reinforcing. This is a persistent dynamic that should last at least as long as the last depression, and likely longer as every parameter is worse going into depression this time. We have more debt, far more structural dependencies (on cheap energy and cheap credit primarily), looming resource limitations, far higher expectations, a much larger population, a far smaller skill base etc. 

I think we are looking at an economic catastrophe of unprecedented proportions, not a bump in the road that can be quickly consigned to history, if only we face our problems head on. In my view we are going to have to live through deflationary deleveraging, a long and grinding depression, and then quite possibly hyperinflation once the international debt financing model is broken, and with it the power of the bond market to constrain currency printing. 

This could easily take twenty years to play out, and even then the upheaval is very unlikely to be over. The last time a major bubble burst – the South Sea Bubble of the 1720s – the aftermath lasted for several decades and culminated in a series of revolutions. This bubble is much larger, and the aftermath is likely to be proportional to the excesses of the preceding bubble. This is why I call the presentation I travel to deliver A Century of Challenges. 

Moreover, I do not see a return to what we consider to be business as usual at any point, because our business as usual scenario is critically dependent on cheap energy, and the energy subsidy inherent in fossil fuels has been a once in a planet’s lifetime deal. We are going to be living on an energy income instead of an energy inheritance, and this will mean living a life none of us in the developed world will recognize.

Stoneleigh – Automatic Earth

Recently, I read up on how Iceland is doing—surprisingly well, actually. Unemployment is down, the Krona is going back up. Good balance of trade, good fiscal balance sheet. Quite the turnaround, after its troubles over the last couple of years—

—so then if Iceland is doing OK, why then are we in the hole that we’re in?

Why is the American economy slogging along? Why is Europe circling the drain? Why are the bond markets queasy as a patient with a low-grade malarial fever? Why is Ben Bernanke’s chin quivering and his voice quaking on 60 Minutes? (And by the way: Was that a terrifying spectacle or what?) Why has the conversation turned from bond market risk to sovereign debt risk? Why are commodities rising, equities moving jagged and irrational, and all of a sudden silver is now the new darling of the retail investor?

What the hell is going on? Why are things getting worse, instead of better? 

The answer is so simple, it hurts:

When the Global Financial Crisis hit in late 2008, the governments took over the liabilities of the financial sector—and in the two years since that terrible, terrible decision, that single move has turned what was once a problem of financial sector insolvency into a problem of sovereign nation insolvency: 

Europe and America are insolvent—they’re broke. They cannot pay the liabilities they have assumed.

That’s why we’re in the trouble we’re in. That’s why Ben Bernanke is crying himself to sleep every night. That’s why the world’s economies are slowly circling the drain—

—remember what happened, in the fall of 2008?

The Federal government bailed out the banks with the famed—not to say infamous—TARP: The Troubled Asset Relief Program, a $700 billion bailout of the banks by any other name.

For its part, in order to “save the financial sector”, the Federal Reserve expanded its balance sheet—that is, it printed money—to the tune of $3 trillion dollars, between Quantitative Easing in ‘08-‘09, QE-lite in early ‘10, and now QE2.

The Europeans made the same mistake as the Americans: They tried to save their banking system. They tried to get through the Global Financial Crisis without any pain.

The Germans bailed out their Landesbank, the UK took over Northern Rock. The Irish bankrolled Allied and Bank of Ireland, the Spanish propped up BBVA—in short, the European governments all assumed responsibility for all their failed banks. They all pretended that it was a liquidity crunch, when it was clearly a banking insolvency crisis.

They’re all paying for this sin today. We’re all paying for this sin today: The inherent instability in all of the markets today is a product of this decision back in 2008—the decision to socialize the financial sector’s losses, instead of letting the insolvent institutions fail.

That the Europeans would socialize the losses is understandable—they’re all a bunch of Socialist pinko-proto-Commie Euro-weenie fellow-travelling Reds: The children of Lenin and Mao, first cousins of Che and Fidel.

But America—what happened in America—land of the free, home of the brave—home of the creative destruction that is the lynchpin of capitalism?

In a word: Capitalism was short-circuited.

See, a bond is a loan—and what’s the underlying risk of lending money? That it won’t be paid back. The interest on a loan is supposed to represent the time-value of the money, plus the risk that the money will not be repaid.

Bond holders of all stripes were supposed to know this—that there was a chance that they would lose the money that they had lent out.

In the run-up to the Crisis in 2008, banks had lent money to dodgy investments—those investments in real estate and whatnot went sour in 2007 and ‘08—boom!: The banks had a loss on their bond portfolio.

The banks’ loss meant that they would default on other loans, to other creditors—usually other banks. So this round-robin of collapsing debt would affect all the banks—

—the banks that had been prudent would suffer losses on these bad loans—but they would likely survive. (Notice how none of the private banks of Europe got into any trouble? Like I said, prudent.)

—but the banks which had been imprudent? The ones which had over-extended themselves? Like all the big banks in America?

They would fail.

So they weren’t allowed to fail.

In 2008, the rationale was, If the banks are allowed to fail—then the entire U.S. economy will die! That was Hank Paulson’s dire warning, when he got on one knee in front of Speaker of the House Nancy Pelosi, and begged her for $700 billion for TARP—with no strings attached—in order to bail out the banks.

That’s what Ben Bernanke rationale, when he ordered the drones at the Fed to start buying up all those Mortgage Backed Security turds, printing up money in order to make the bailout happen. 

Capitalism’s creative destruction was not allowed to have its way with these banks. They were called “systemically important”. They were called “too big to fail”—

—but right away, you know this is bullshit: In capitalism, nothing is too big to fail. That’s the whole point of capitalism: There are no sacred cows.

But enough people in positions of leadership said that the economy would die, if the banks weren’t saved—so they were saved.

And what was the result of this lifeline to the banks?

You can look at it from all sorts of angles, but bottom line, the State assumed the losses of the banks. The banks’ liabilities became the government’s liabilities—and ultimately, the people’s liabilities. Because the people will wind up paying.

Some fools still believe that if the banks hadn’t been saved, then our economy would have died! Died dead! Died like the dodo!

Oh really . . .

Well, I disagree: I think it would have been better to let the chips fall where they may—give capitalism’s creative destruction free reign—let the virtuous be saved and the evil perish—

—in short, I think we would be better off today, if we’d let the banking system fail back in 2008.

And I have proof that it would have been better: I can prove that if we’d let the insolvent banks fail, the world’s economy would be better off today. We wouldn’t have the current uncertainty, and instability. 

My proof?

Compare-and-contrast the fates of Ireland and Iceland: 

On the one hand, Iceland’s people refused to have their government be saddled with the debt of their insolvent banks, Landsbanki and Kaupthing and the others. The Icelanders requested an IMF bailout to the tune of $2.1 billion (compared to their GDP of $12 billion). But they refused—vociferously—to be saddled with the debts of their banks.

Chilling in Iceland.

What were the consequences? The Krona suffered an 80% devaluation, interest rates went to the moon. Unemployment spiked from 6% to 9.3% in a month . . .

. . . but it wasn’t that bad. It wasn’t fun, but it wasn’t the end of the word, either. Even with severe austerity measures that included higher taxes on all sectors of the economy and severe cuts in public services, unemployment reached only 9.6% at its worst point, averaged 8.8% during 2009, and is now only 7.6%. Source is here.

On the other hand, what did Ireland do?

When it’s banks were shown to be insolvent in the fall of 2008, Prime Minister Brian Cowen went and guaranteed the Irish banks. In other words, he made the Irish government assume the debts of the banking sector.

Ireland hasn’t had a moment’s peace of mind ever since—for two years, the Irish have been stumbling about, trying to make good on their banks’ liabilities, while the country slowly sinks.

Finally, a couple of weeks ago after a bond market mini-panic, the Irish were bailed out by the ECB and the IMF—the Irish fought centuries of British rule, only to finally surrender their sovereignty to bureacrats from Brussels.

Drinking and crying in Ireland.

Will the Irish situation get any better?

In a word, no. The Irish are still saddled with the euro—they haven’t been able to devalue their currency, in order to restart their internal economy, and make themselves attractive to foreign capital. Coupled with that, they have had to take severe austerity measures and tax hikes, in order to make good on the bonds that the Irish banks owe.

That is to say: The Irish people are suffering, so that UK and German bankers don’t have to take any losses.

Meanwhile, in Iceland today, after seven consecutive quarters of negative growth, the Icelander economy is picking up. In 2011, the Icelander government will have a surplus; the balance of trade is already in surplus. With the devalued Krona, Iceland became a magnet for foreign investment. Unemployment is going down.

Things are good in Iceland.

In Ireland? Not so much—and they won’t be getting any better any time soon. The rosiest predictions have the Irish economy turning around in 2013, 2014 . . . maybe.

What lessons do these two countries teach us? 

The Irish? They tried to save their gangrenous hand back in 2008—so then over the next two years, their whole arm has now turned gangrenous.

But instead of cutting it off, they’re trying to save the arm too—and they’re praying that the gangrene doesn’t get to the body and kill them.

These are just two small countries—Iceland and Ireland—and I’m sure a lot of critics will say, “These two countries have nothing in common with giant economies like the U.S. and the EU—nothing in common at all!”

Oh, but that’s where they’re wrong: Economics is trigonometry—the ratio of a diagonal of a square is the same no matter the size of the square. Likewise with economies: The basic problem of any economy is the same, regardless of its size.

An overlarge economy—like the American and European economies—might be able to palliate the symptoms of the economic disease. They might even be able to hide the symptoms altogether, and make fools think for a little while that the disease is all gone—the patient all better.

But truth outs, one way or another.

The sin of the American and European economies was to guarantee the banks. Whether out of stupidity, blindness or corruption, America and Europe pretended the banking insolvency was merely a liquidity issue—

—so they socialized the banks’ losses.

That’s why the American economy is teetering, while Europe goes from crisis to crisis—Greece—Ireland—Spain next—Italy soon to be up.

Because of stupidity, blindness or corruption, the American and European leadership saddled their people with debts that cannot be paid.

I have argued in my hyperinflation pieces that the only way to get out of an unpayable debt is to either default on the debt, or inflate away the currency.

The Europeans are grimly trying to pay off all the debts while defending a strong euro—it’s an ugly sight.

The Americans are trying to inflate away their debt—the Federal Reserve is now fully monetizing the Federal government debt, conjuring money out of thin air and thereby covering the fiscal deficit.

In other words, in both cases, the gangrene has spread from the hand in 2008, to the limb in 2009 and 2010—and now as we welcome 2011, the gangrene has spread to the body.

All in all, I think we’re all going to wish we had done like Iceland. If we had, we’d be chillin’ like the Icelanders, instead of crying ourselves to sleep every night.
• To read my posts on hyperinflation, please click here. 
• To read my posts on the European situation, please click here.  
Gonzalo Lira

Selling government debt is a gigantic confidence game.  For decades, investors all over the globe have gobbled up massive amounts of U.S. debt at incredibly low interest rates because they believed that it was a certainly that they would be paid back and be able to make a little bit of profit on top of it.  Unfortunately, things have changed.  Confidence is U.S. Treasuries is dying, and if confidence in U.S. government debt completely collapses at some point we could literally be looking at financial Armageddon.  Why is that so?  Well, when the world totally loses faith in U.S. Treasuries, interest rates on U.S. Treasuries will have to keep going up until enough investors are found to buy them.  But much higher interest rates will mean much higher interest on the national debt and thus much higher federal budget deficits.  That will erode confidence in U.S. Treasuries even further.  In the end, a vicious cycle of eroding confidence and higher interest rates could ultimately lead to hyperinflation as the U.S. government and the Federal Reserve flood the system with endless amounts of paper money to try to keep the system solvent.

Faith in U.S. Treasury bonds is absolutely critical if the world financial system is going to continue to operate in a stable manner.  In the post-World War 2 era, U.S. Treasuries have been largely viewed as the absolutely safest investment out there.  So if there comes a point when the market for U.S. Treasuries completely collapses, it is going to cause unprecedented financial chaos.  The worldwide derivatives market, which is already highly unstable, would almost certainly implode.  Credit markets all over the globe would seize up.  Global trade would quickly grind to a standstill.

This isn’t going to happen overnight (hopefully).  Rather, the loss of confidence in U.S. Treasuries is something that is likely to take months or even years to play out.  But once that confidence is gone, it is not something that will be able to be rebuilt easily.

Think of it this way – once you drive a car off a cliff, is it easy to reconstruct it?

Of course not.

Well, that is where we are headed with U.S. Treasuries.

The Federal Reserve is flooding the system with new dollars, Barack Obama and the U.S. Congress seem poised to pass a new tax deal which does not include corresponding spending cuts which will cause U.S. government budget deficits to become even more bloated, and there is a tremendous lack of faith both in U.S. political leaders and in the Federal Reserve at this point.

The rest of the world is losing faith that the U.S. government is going to be able to handle all of the debt that it has accumulated.  We may be approaching a “tipping point” soon.

The following are 10 signs that confidence in U.S. Treasuries is dying….

#1 The financial community is extremely concerned that the tax deal that Barack Obama is pushing is going to dramatically increase U.S. government budget deficits over the next two years.  On Monday, Moody’s warned that if Barack Obama’s tax deal with the Republicans becomes law, it will increase the likelihood that Moody’s could soon be forced to slash the rating of U.S. government debt.

#2 Already there are signs that some bond investors are looking for the exits.  Last week, U.S. Treasuries suffered their largest  two day sell-off since the collapse of Lehman Brothers back in September 2008.

#3 The yield on 10-year Treasury bonds set a six-month high on Monday before pulling back a bit.  Most analysts believe that Treasury yields are going to push significantly higher in coming weeks.

#4 This trend of rising yields has been going on for a while.  In fact, yields on 10-year Treasury bonds have been steadily rising since October 7th.

#5 Even before the recent tax deal was announced there were already troubling signs regarding the growth of U.S. government debt.  The U.S. government budget deficit rose to $150.4 billion in November, which was the largest November budget deficit ever recorded.

#6 It is not just the new tax deal that has investors around the globe spooked.  The truth is that the rest of the globe reacted very negatively to the new round of quantitative easing that the Federal Reserve announced back in November.  The Federal Reserve is flooding the system with liquidity and the rest of the world is not amused.

#7 The American people have less faith in the Federal Reserve and in the financial system than at any other point in recent memory.  For example, a new Bloomberg National Poll has found that a majority of Americans now want the Federal Reserve to either be held more accountable or to be abolished entirely.

#8 Investors all over the globe are starting to wake up and realize that America’s debt problem is unsolvable.  David Bloom, the currency chief at HSBC, raised eyebrows when he recently stated that “if yields are rising because people think America’s fiscal situation is unsustainable, then its Armaggedon.”

#9 There is also a growing feeling among investors that the Federal Reserve simply does not care about the danger of inflation, and this is making bondholders very nervous.  Stephen Lewis of Monument Securities recently put it this way….

“There is a feeling that the Fed doesn’t care about inflation – in fact, wants more of it – and that is certainly not in the interest of bondholders.“

#10 Over the next 12 months, the U.S. government is going to be rolling over trillions of dollars in debt along with all of the new borrowing that it is going to be doing. In fact, the U.S. government is somehow going to have to find a way to finance debt that is equivalent to 27.8 percent of GDP in 2011.

For years our politicians have told us that “deficits don’t matter”, but the truth is that they do matter.  The national debt of the United States is now the biggest debt in the history of the world by far, and yet most Americans do not seem to grasp the absolute financial horror that we are facing as a nation.

In the end, debt is always painful.  It can be a lot of fun to run out and buy a beautiful new house, a couple of brand new cars and to run your credit cards up to the max, but eventually it catches up with you.  Well, the same thing is now happening to us on a national level.

We are getting to the point where eventually we are not even going to be able to service the debt that we have already piled up.  Once that happens we can either declare national bankruptcy or we can try to hyperinflate our way out of trouble.

Meanwhile, the once great U.S. economic machine is dying as well.  The only reason we have been able to survive with all of this debt as long as we have is because of how powerful our economy has been.

But over the past couple of decades, the big global corporations that now dominate our economy have shipped thousands of factories and millions of jobs overseas.

The mighty economic machine which is supposed to provide funds to pay off all of this debt is being dismantled right in front of our eyes.

There was no way in the world that U.S. government debt was going to be sustainable even if our economy remained vibrant and healthy.  The sad truth is that U.S. government debt is approximately 13 times larger than it was just 30 years ago.

But now that the “real economy” is dying a savage death there is simply no hope that this thing is ever going to turn around.  The only thing left to do is to take bets on when the implosion is going to happen.

All of this “great tax cut debate” nonsense going on in Washington D.C. right now is just a bunch of incompetent politicians running around rearranging the deck chairs on the Titanic.  Perhaps these tax cuts will provide enough of a short-term economic boost to get many of them re-elected in 2012.  Meanwhile, our long-term economic problems continue to get a lot worse.

It has become quite obvious that Barack Obama is completely clueless about the economy, and what is even sadder is that the “highly educated” Chairman of the Federal Reserve, Ben Bernanke, seems almost equally as clueless.

Unfortunately, Americans have become so dumbed-down that they don’t even realize that their leaders are incompetent.  In fact, as sad as it is to say, most Americans you will meet on the street probably cannot even tell you what U.S. Treasuries are.

Let us hope and pray that investors around the globe continue to have at least some confidence in U.S. Treasuries for at least a little while longer.  When “financial Armageddon” finally does happen, it isn’t going to be pleasant for any of us.

So enjoy these happy economic times while you still have them, because at some point things are going to get a whole lot worse.

The Economic Collapse

Because the response to this petition has been so strong, we’re holding it open for another 48 hours, so please forward this message to your friends and family and ask them to add their names by visiting www.crimeshouldntpay.com.