Crazy Debt Projections, The New Global Currency, Congress’ Very Bad Idea and More!

by Addison Wiggin & Ian Mathias

  • The elephant in the room… government admits debt crisis just around the corner
  • Bill Jenkins on the new reserve currency… and why BRICs should be careful what they wish for
  • An oil reserve discovery “in the same scope as those of Saudi Arabia”
  • Since it worked so well before: Congress pushes Fannie and Freddie to slacken standards
  • Plus, Greenspan on inflation, your thoughts on Warren Buffett and more!


  It’s Friday… why not start with some good news? Americans are saving at the highest rate in 15 years. According to this morning’s personal income and spending report from the Commerce Department, the consumer savings rate is up to 6.9%, its best since 1993. Americans have stashed away an estimated $768 billion, an all-time high. Bravo… now if only our government would follow suit…

  “Under current law, the federal budget is on an unsustainable path,” begins the latest report from the Congressional Budget Office. The report, titled The Long Term Budget Outlook, was about as bad as you’d expect… maybe even worse. At the heart of the matter, this chart:

The CBO (which is a government arm, mind you) predicts that, under the most likely scenario, our national debt will exceed 100% of our GDP by 2023… 200% by the late 2030s. Man, who could have seen this coming?

In formulating their projections, the CBO used two scenarios. The first, the “extended baseline scenario,” assumes things will remain about the same over the next decade… all scheduled changes under current law will occur and all budget projections will be met. The second, their “alternative fiscal scenario,” accounts for budget changes widely expected to occur… like preserving Bush tax cuts for the middle class, reigning in the alternative minimum tax and failure to drastically cut Medicare costs.

Both scenarios paint a dark picture for our fiscal future. No CBO report has ever predicted this much debt, accumulated at such a rate. And we hasten to add, the CBO is assuming — like the rest of the government — that the worst of the recession is largely behind us.

  So can we stop this runaway train? Sure, says the CBO… but it won’t be easy. Even under the less severe scenario, “an immediate and permanent reduction in spending or an immediate and permanent increase in revenues equal to 3.2% of GDP would be needed to create a sustainable fiscal path for the next three-quarters of a century.”

If we’re reading this right, that means Uncle Sam will need to cut spending or raise taxes by about $440 billion and maintain those adjustments every year for a long, long time. Under the CBO’s worse, more likely scenario, it’s closer to $740 billion.

  So are you really surprised to hear this?

“To prevent the deficiencies in the main reserve currency,” reads a report released today by the People’s Bank of China, “there’s a need to create a new currency that is delinked from the economies of the issuers.”

That’s right, another call from China to ditch the dollar as the world’s reserve currency. “Special drawing rights of the IMF should be given full play,” said the state-run bank, “and the international body should manage part of its members’ reserves.”

We took note a few weeks ago when Brazil, Russia and China cleverly announced an $80 billion swap of IMF bonds for U.S. Treasuries. Factor in today’s report from China and previous similar calls from Russia… perhaps the IMF will be the nexus of this monetary overhaul.

  “As BRIC nations have sent up a hue and cry for a supranational currency,” ponders our currency adviser Bill Jenkins, “I have to wonder if they have really learned any lessons at all. First, their complaints have centered around a single manipulated currency at whose mercy they find themselves. They seem to intuitively know that a fiat currency system is flawed. It is flawed because men are easily corrupted.

“But what is their solution? More of the same. Another fiat currency. Actually, a currency made up of a basket of currencies. This should really strike us as hilariously funny, if it weren’t so sad. And by sad, I mean stupid. It’s like draining bad oil out of a motor and replacing it with equally bad oil. Or like removing a tire that has a nail in it, only to replace it with one that is dry-rotted.

“What’s more, both India and Russia still receive foreign aid from the United States. They’re rather like a rebellious teenager who takes potshots at their parents while holding out their hand for cash and car keys.

“Beyond that, consider that the BRIC nations hold over 30% of the U.S. Treasury market. That’s a lot of eggs in one basket. So when they start grumbling about policy, they can really strike a fire. On the other hand, upsetting the basket breaks a lot of their own eggs.

“BRIC nations are still reliant on the American economy, as well as highly connected to dollar-based difficulties. So as they chop away at the tree, they had better be careful, lest it fall on them.”

Bill’s the man behind one of our newest services: Master FX Options Trader. He’s done a fine job guiding readers through profitable, easy to understand currency trades without the nail-biting leverage commonly associated with the forex game. If you’d like his help trading currencies, learn more here.

  “The oil resources off Brazil are in the same scope as those of Saudi Arabia,” adds Byron King. “The oil potential is huge. Beyond huge. It’s a game changer for the world of energy. No, the Brazilian resource doesn’t mean that Peak Oil is history. But it does mean that history is about to change. Indeed, the angel of history is favoring the nation of Brazil.

”The problem with the oil offshore Brazil is that the hydrocarbons are far out — up to 200 miles into the open ocean. They’re under one-two miles of seawater, and then buried under three-four miles of rock and salt. It won’t be easy to define the resource, or to extract it. Still, the investment opportunities are there.

”One of the strongest investment sectors of the next 20 or 30 years will be drilling for oil and natural gas offshore, in the deep water of the world. Offshore Brazil is right on the cusp of a monumental oil boom. That deep-water offshore boom will eventually migrate to offshore West Africa, even more than the relatively near-shore development of the past 30 years. Eventually, the deep-water development will move into the Arctic Ocean.”

The title of Byron’s presentation at our Investment Symposium this year is “Is God Brazilian?” Heh, c’mon… how can you miss that?

  Oil’s down a few cents today, to $69 a barrel.

  The dollar is under some substantial selling pressure, thanks to the CBO’s report and China’s continued call for a new reserve currency. The dollar index has slipped under 80 again, a longtime level of support, to 79.8 as we write.

That bumps the euro back to $1.40, just off its weekly high. Ditto with the pound, at $1.65.

  “I see inflation as the greater future challenge," said the master of easy money himself, Alan Greenspan. "If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012… earlier if markets anticipate a prolonged period of elevated money supply.”

Of course, Dr. Greenspan was quick to offer his advice in his latest FT Op-Ed: “The U.S. is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation."

You know, don’t keep rates too low for too long or else it will simply fuel the next crisis… sound familiar?

  Today’s not so bright idea: Congress is urging Fannie Mae and Freddie Mac to relax its standards on condo mortgages.

Believe it or not, Fannie Mae made some smart policy changes back in March (though they would have been exceptionally more useful in March 2007). The company said it would not back mortgages on condos in developments where fewer than 70% of units have been sold, up from their old policy of 51%. Fannie Mae also decided to not guarantee mortgages in condo communities where more than 15% of the condo owners were delinquent, nor will they entertain condo mortgages in which one borrower owns more than 10% of the community.

Reasonable, don’t you think?

Not so, say representatives Barney Frank and Anthony Weiner. The two issued formal letters to Fannie and Freddie saying that such stringent practices “may be too onerous” and urged both companies to “make appropriate adjustments.” Otherwise, these outrageously conservative policies would have “a real chill on the ability to get these condos sold,” said Weiner.

Ugh… fools.

  No surprise, gold is up today. The spot price has inched up $10 from yesterday’s average, to $945 an ounce.

  The stock market — not yet ready to address the looming crises we’ve mentioned today — rallied strongly yesterday. The S&P 500 broke its three-day streak of dull trading with a 2.1% leap. As a matter of fact, that’s just enough to bump the index into the black for 2009… for now, anyway.

Stocks got a boost thanks to some good news from beaten-down companies… Lennar Homes and Bed Bath & Beyond both issued way-better-than-expected earnings reports. Also, Ben Bernanke managed to not incriminate himself while testifying before Congress about his role in Bank of America’s shotgun marriage with Merrill Lynch, and another auction of 7-year bonds went swimmingly.

  Jobless claims have suddenly popped to their highest level in a month. The Labor Department said yesterday that initial claims for unemployment benefits rose to 627,000 last week — well above Wall Street estimates of 600,000. Rest assured, though, the government arm was quick to point out that the sudden jump was due to the end of the school year and subsequent teacher layoffs… since those kinds of job losses really don’t count.

Continuing claims for unemployment now rest at 6.7 million, just under the previous week’s record of 6.8 million.

  “Here’s my bid for lunch with Warren Buffett: $3.50,” a reader writes, clearly none too pleased with the Oracle of Omaha. “That’s for my lunch. I assume Uncle B. can afford his own. Bring your own Coke. And I want the CEO of Moody’s there. I have a few questions for him and his owner. Warren pays for his lunch too.”

The 5: Heh. That might get you a lemon wedge at Smith & Wollensky. Hope you eat a little beforehand.

It is worth noting that Buffett has gotten the pass from most major media outlets as far as his ownership of Moody’s is concerned. It’s hard to picture the lovable old fella at the top of one of the world’s most hated, most dubious companies. He told shareholders this year at the annual meeting that Moody’s “made a huge mistake, and the American people made a huge mistake,” and that’s about the closest thing to a mea culpa we’ve ever heard from him on the matter. Berkshire Hathaway still owns about 20% of the company… even after Moody’s stripped them of their AAA rating back in April.

And that charity lunch for Buffett is going for $456,000 as we write, just a hair above your three bucks and change, but down a whole lot from last year’s wining bid of $2.1 million. The auction ends later tonight… we’ll let you know the gritty details Monday.

Have a nice weekend,

Ian Mathias

The 5 Min. Forecast

P.S. Is your portfolio prepared for another market fall? Learn our favorite way to play the next leg of the bear market here… The Fear Factor Strategy.


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