Stealth Default

Addison Wiggin – July 19, 2011

  • “Debt Debate Rages,” “Gold $1,600” and other flashbacks from a decade in the trenches…
  • Far from the debate: The “stealth default” everyone agrees to, but no one acknowledges… giving up steak for burgers and burgers for cat food…
  • Stalled lawsuits and school bus fees: Even more new tales of bankrupt governments, coming to a town near you
  • How to profit from those dollar coins no one wants… at least until they’re onto you…
  • ID check to buy gold? A reader inquires… New perspective on getting fined for rainwater… and reader gratitude for small favors… and more… Thanks for reading!

   While standing in line at the Dollar rental car lounge near LAX this morning, we saw these two headlines run back to back on a TV monitor: “Government Debt Ceiling Debate to Rage for Two More Weeks” and “Gold Hits Record High $1,600.”

We’re in town (yet again) to edit our film Risk! following our “focus group” screening at the Anthem Film Festival last week in Las Vegas. We’re spit-shining the film for another screening again next week in Vancouver at the AF investment symposium.

Seeing the news took us back. A decade ago, in the early days of The Daily Reckoning, you would never have seen “debt” and “gold” in the headlines, let alone back-to-back.

Back then, we warned of rising debt levels. On this day 10 years ago the national debt was a quaint $5,705,050,480,267.56… but we didn’t like the trend. For two years already, we had also been recommending you buy gold. On this day 10 years ago, gold was trading for $266. This morning, it clocked in at $1,602…

How times change. Still, we can’t help but think we’re just getting started.

“All we need,” wrote our friend James Turk this morning, “is a little bit of a fuse on any one of these monetary events — the U.S. or the EU — to put a tidal wave of buying into the precious metals.”

Let’s check in on one of them.

   The debt ceiling deadline looms just two weeks from today. Yet one of the few points of agreement between the White House and Congress all but guarantees a default.

   Let’s back up a bit. It may be hard to see close up. But from Germany, it’s easy to see that the debate over the debt ceiling is merely posturing.

“Obama does not want to go down in history as the president who bankrupted America,” writes the business daily Handelsblatt, “so the only alternative is another unsavory deal — the ‘kick the can down the road’ solution, as American politicians like to call it.

“The debt limit will be raised again just before the impending volcanic eruption, exacerbating the problem and postponing an attempt to solve the problem (of the U.S.’ enormous debt) to the next, not-too-distant deadline.

“Investors are also counting on this scenario. That is the only explanation for the relative calm on the market for U.S. government bonds.”

Indeed, a 10-year Treasury yields 2.94% this morning — down from nearly 3.2% at the beginning of this month. If the bond vigilantes were any more calm than they are now, they’d be on Quaaludes.

“It’s pretty clear they are going to raise the debt ceiling,” adds our friend David Walker, the former U.S. comptroller general, “but I don’t think we’re going to get a grand bargain” that slashes a substantial amount of the annual deficit.

   But whatever agreement emerges from the backroom dealing, it is now almost sure to include what we’ve labeled a “stealth default” on Social Security.

The White House quietly put out the word two weeks ago that it’s on board. Congressional Republicans think it’s a super idea, too. “There hasn’t been any economist anywhere that says we shouldn’t do that,” says Sen. Tom Coburn (R-Okla.).

Of course, they don’t call it a stealth default. They call it “chained CPI.”

This stealth default has occurred before. When Social Security was in trouble in 1983, one of the Greenspan Commission’s fixes included an adjustment to the consumer price index known as “substitution.”

It works like this: If steak gets too expensive and you start buying hamburger instead… well, your price of beef hasn’t really gone up and your cost of living is unchanged. This is one of the reasons official CPI is running 3.6%, but if it were still calculated the way it was before the Greenspan Commission went to work, it would be 11.1%.

Because Social Security benefits are keyed to CPI, this has resulted in a substantial savings for Uncle Sam. But fast-forward 28 years and Uncle Sam has burned through all the trust fund money just to pay his bills, and “substitution” alone isn’t good enough. Hence, “chained CPI.”

Under “chained CPI,” if your hamburger gets too expensive and you start buying beans instead… well, your price of protein hasn’t really gone up and your cost of living is unchanged.

   “Chained CPI” could cost the average Social Security recipient $720 a year in inflation-adjusted benefits, according to the Senior Citizens League. Sounds like a default to us… even if The Washington Post doesn’t call it that.

“This is a default,” says Rep. Ron Paul, who cares little about goring sacred oxen in Washington. “Just because it is a default on the people and not the banks and foreign holders of our debt does not mean it doesn’t count.”

Our forecast: This broken promise will be the first of many.

At some point in the not-too-distant future, politicians will no longer be able to kick the can… because the can will be smack up against a brick wall. The government will no longer be able to borrow money… not because of some arbitrary debt ceiling… but because no one will want to lend the government the money. At least not cheaply or easily. Not the Chinese, not the pension funds, no one.

That’s a real crisis.

   “The civil justice system in San Francisco is collapsing,” says presiding Judge Katherine Feinstein of the San Francisco Superior Court, turning our attention to systemic breakdown on the local level.

In this case, a court staff of 400 will be slashed to 280 by the end of September, thanks to a loss of revenue from the state.

Want to finalize a divorce? That could take 18 months. Filing a lawsuit? It could take five years before it goes to trial. Criminal cases will be largely unaffected, because of the constitutional right to a speedy trial. But nearly everything else is about to proceed at tortoise pace.

   In Texas, the Dallas suburb of Keller is about to charge parents who want to put their kids on the school bus. The charge will be $185 per semester for one child, $135 for the second.

The school district says the new fee is necessary because voters turned down a 13 cent increase in the property tax rate. Some voters disagree. “Cut central admin, cut the number of teachers,” writes a commenter at the website of a Dallas-area TV station, “but no, they want to intimidate parents.”

We’re not there, so we don’t know who’s right. But we’re certain this sort of conflict is going to playing out, in one form or another, wherever you are.

How deeply is your state in debt? How much does your state depend on benefits from Washington that may not be there in the future? How much are you on the hook for the pensions of state workers? We’ve gathered the answers to all those questions in one place… and put them in a special report called American Oases. Here’s where you can get yours.

   The stock market was down yesterday. Today it’s up — big. The Dow is close to 12,500 again, driven by earnings numbers from the likes of IBM… and an upbeat report on housing starts from the Commerce Department.

   Even as hot money floods back into stocks, gold is holding its own. As we said, the spot price is up to $1,602. And silver is holding above $40, at $40.30.

   This morning, a 10-year Treasury note yields less than the official CPI… but a handful of Americans have figured out how to turn a profit from Uncle Sam all the same.

You may recall the mound of dollar coins — presidential dollars, Sacagawea dollars, Susan B. Anthony dollars, $1 billion in face value — piling up in Federal Reserve vaults? Users still prefer the paper variety but the U.S. Mint keeps cranking out dollar coins anyway… because it’s the law.

Turns out there’s a way to arbitrage them.

Really, this is ingenious: Use a credit card to buy a boatload of dollar coins. The Mint sells them at face value and ships them for free. They want to get the coins into circulation.

Then, you take the coins to the bank, deposit them and pay off the credit card bill. Voila… easy and painless frequent-flyer miles. “We’ve used them to go on trips around the world,” says Jane Liaw, described by NPR as a “public health researcher.”

Of course, because no one wants the coins, in time, they end up back in Fed vaults.

With all this discussion about dollar coins worth 7 cents in melt value, we figure we owe you a picture of something with more lasting value…

Alas, the Mint has caught on. It sends letters to people it thinks are “abusing” the system, rationing them to purchases of $1,000 every 10 days.

   “I went to my favorite coin and bullion dealer to purchase some silver today,” writes a reader in Omaha. “For the first time since I started buying gold and silver from this dealer seven years ago, he asked me for identification.”

“I laughed at first, saying, ‘You know me, I’ve bought and sold gold and silver from you for years now.’”

“He didn’t smile back and said, ‘I need a picture ID with your address on it, so I’m only taking driver’s licenses.’”

“I said, ‘Really, what if I can’t produce a driver’s license?’”

“He said, ‘Then I lose a sale.’” “So for the first time ever, I pulled out my driver’s license and handed it to the dealer, who copied it to the receipt of the silver purchase I had just made. I asked him what he was going to do with my personal information.”

“He said that he ‘will keep it on file.’” “I asked him, ‘Why do you need that information now when it wasn’t required before today?’”

“He looked at me like I was crazy and said, ‘What do you think? Some new federal law is forcing me to keep track of all silver and gold sales and purchases. Look, I don’t like this any more that you do, but I go out of business if I don’t comply.’”

“When I got home, I called two other dealers I have done business with in the past, and they all said the same thing. None of them could name the law, which I suspect is the Dodd-Frank bill.”

“The fact that I have to show ID to purchase or sell gold or silver from now on not only pisses me off but it chills me to the bone that it is only one short step to requiring everyone to show ID when purchasing anything.”

The 5: First we’ve heard about it. We’re curious to hear if others have had a similar experience.

Of course, there’s nothing like holding gold in your physical possession… but if you’re not comfortable with a dealer taking down your personal information, it’s one more argument in favor of “offshore gold storage programs.”

We detail them in a special report that goes to all new readers of Apogee Advisory. Two of them have no account minimums. If you’re interested, look here.

   “Is it true President Barack Obama is planning to implement a 1% bank transfer tax on all transactions?” another reader inquires. “Supposedly this — HR 4646 — is a done deal, to take effect after the November elections. Please say it ain’t so!”

The 5: It ain’t so. Curious that this is the second time this month we’ve had to smack down the rumor, though…

   “I believe the crackdown on businesses allowing rainwater to run off into storm sewers is a regulation that has been in effect for many, many, years,” writes a reader following up on yesterday’s issue.

“My recollection is the EPA and Clean Water Act are the driving forces. We had to deal with planning such things for basic building parking lots in Southern California maybe 15 years ago. It is just now getting enforced and is likely, indeed, because of a desire to find more revenue.”

“Yes, you are supposed to capture and ‘treat’ the runoff so automotive junk does not get into the rivers and bay.”

The 5: Why build storm drains at all then? Oy.


Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S. “Thank you,” a reader writes, “for letting us read (skim) the Apogee ad.” “I never thought I would thank anybody for letting me read a promo, but I was always a little curious what those long-winded videos were about… but not curious enough to waste 15 or 20 minutes of my life (times three-six for other publications). Life is too short.”

“In the past,” writes another, “when I clicked on a link and saw it was a video, I simply X’d out. No time and no choice to read as much or little as I wanted. This one I actually read, and even ordered Apogee.”

To new readers, welcome. To prospective readers, in case you missed the text version and want to see what it’s all about… here you go.

P.P.S. Whatever crisis is taking shape, there’s a good chance it will get violent. Over the weekend in San Francisco, police ended up shooting and killing a guy… and it all started because he didn’t pay train fare.

The particulars of the story are in dispute. The cops say the guy panicked and opened fire on them. Witnesses say he was unarmed. A gun was recovered at the scene. Did it belong to the guy? He was wanted for questioning in a murder in Seattle.

Bystanders captured the immediate aftermath on video: Watch only if you have a strong stomach.

Whatever the truth, the guy is dead… and the sequence of events began with the cops scaring up revenue for the city by patrolling for train fare scofflaws. We suspect there’s more where this came from. Check out some more stories from the immediate near future right here.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More