A Default By Any Other Name

Addison Wiggin – July 22, 2011

  • “Greece is rescued!” cry the traders. “Greece is finished” say the Greeks. A harbinger for Americans from a modern-day bread line…
  • The U.S. government has defaulted five times before… and how the next time could look a lot like Greece
  • Gold persists near $1,600: Rick Rule on why now is junior miners’ time to shine
  • “Where’s my receipt!?” Shoppers recoil against the ultimate in Chinese knockoffs
  • Final advice on presenting ID during a precious metals transaction… a lament for American inventions… and your next-to-last chance to lock in Vancouver CDs at the lowest price

   “Katarina is ashamed and prefers not to give her full name,” reads a cautionary tale in Germany’s weekly Der Spiegel. She and her 7-year-old daughter stand in line at a food bank.

1,200 meals are taken in only 29 minutes. Traffic has grown 30% in recent months. “The workers try to make sure that they don’t always supply the same people,” says the article.

The setting is Athens 2011.

Athens, 2011: a more common image of a beggar…

Katrina lost her job a year ago. Prospects for a new one are grim. “No one will even pay you to stuff mailboxes with advertisements anymore,” she says. “Greece is finished.”

   Of course, you wouldn’t know Greece is finished from this morning’s headlines. Eurozone leaders have put all their ducks in a row for another bailout, totaling $155 billion.

Never mind that Fitch classifies the deal as a “restricted default” because bondholders will assume some of the burden. Never mind that the Financial Times characterizes the deal as a “potentially unlimited guarantee that could see European taxpayers fund Greece for years.”

European stock indexes have rallied. The euro has firmed to $1.434.

   We won’t belabor the point. Greece can’t solve a problem of too much debt by taking on even more. We will note, however, that by some measures, the United States is even more deeply in hock than Greece.

Greece’s debt-to-GDP ratio is 143%. America’s is officially 97%. But the $14.3 trillion national debt, stacked up against a $14.7 trillion economy, doesn’t tell the whole story.

  • $14.3 trillion: “Official” national debt
  • $5 trillion: Amount Uncle Sam is on the hook for Fannie Mae and Freddie Mac
  • $62 trillion: Total liabilities and unfunded obligations for Social Security and Medicare

That’s more than $81 trillion… or a debt-to-GDP ratio of 553%.

   And that doesn’t count the black box of bailouts.

We know how much the Federal Reserve doled out in emergency loans: $16.1 trillion between Dec. 1, 2007, and July 21, 2010. We know that because yesterday the Government Accountability Office completed its first-ever audit of the Fed, made possible largely through the persistence of Rep. Ron Paul making that audit, however incomplete, the law.

What we don’t know is how much of that has been paid back. “We have literally injected about $5.3 trillion,” said Dr. Paul last week during his questioning of Fed chief Ben Bernanke, “and I don’t think we got very much for it. The national debt went up $5.1 trillion.”

Bernanke did not challenge those figures.

   “To get our overall fiscal gap under control,” writes Boston University professor Laurence Kotlikoff in Bloomberg, “the U.S. must cut spending or raise tax revenue by $20 trillion over the next decade, far more than either the president wants or the House Republicans seek.”

Yep: The latest number we see bruited in Washington this morning is $3 trillion. Whatever the final number — and there will be a last-minute deal; there always is — it will be substantially less than $20 trillion over 10 years. The can will be kicked… as it keeps getting kicked in Greece.

   We note here that the total of outstanding credit default swaps on U.S. Treasuries crested $4.8 billion this week. Uncle Sam has now surpassed Greece in this category.

Measured in year-over-year change, America’s No. 1: Net notional CDS outstanding grew 109%. That means there’s double the bets out there on a U.S. default compared with a year ago.

   “You may not know this, but the U.S. has actually defaulted a number of times already,” writes Chris Mayer this morning. He cites five instances:

  • 1779: The government was unable to redeem the continental currency issued during the Revolutionary War
  • 1782: The Colonies defaulted on the debt they took out to pay for the war
  • 1862: During the Civil War, the Union failed to redeem dollars for gold at terms stated by the debt contracts
  • 1934: FDR defaults on the debt issued to finance World War I, refusing to redeem it in gold. The dollar is devalued 40% against gold
  • 1979: A bureaucratic snafu results in interest going unpaid on some small bills.

“With the exception of 1979,” Chris says, “which was mostly due to administrative confusion — the U.S. simply ran out of money each time. The end result was the dollar had to be devalued. Meaning it lost significant purchasing power.

“My guess is that the U.S. will default again. It may not technically be called that, but the only way for the U.S. to meet its financial obligations is to print a lot of money.”

What does that mean in practical terms?

   In Greece, professor Savas Robolis at Panteion University in Athens reckons that by 2015, the average Greek employee and pensioner’s standard of living will have fallen 40% compared with 2008.

Even now, Americans are turning to their credit cards to pay for groceries and gas. According to First Data Corp., the volume of gasoline purchases put on credit cards jumped 39% over the last 12 months.

You don’t want to be the average American in a default scenario, whenever it arrives. Ray Dalio, the head of Bridgewater Associates, the world’s biggest hedge fund, puts that day in “late 2012 or early 2013.”

Instead, you want to take a few basic steps to protect what you have right now. We suggest several here.

   Stocks are down this morning, but not much compared with yesterday’s big run-up. The S&P is hovering right around that key level of 1,344 — the high it reached last February.

The indexes are turning less on the Greek news and more on quarterly numbers from Caterpillar: When an internationally diversified industrial behemoth turns in earnings that don’t meet the consensus guess, traders don’t like it.

Cat attributes some of the weakness to slowing demand in China we wrote about yesterday and the day before. We expect, for better or worse, we’re going to be covering it quite a bit in the weeks ahead.

   Gold has gyrated between roughly $1,587 and $1,600 over the last 24 hours. As we write, it’s at $1,598. Silver is a few pennies shy of $40.

   “We are buyers again” of junior gold miners, says Vancouver favorite Rick Rule. “This is certainly a point in time where the equities, in particular the equities in contrast to the bullion, which has done very well, are not unattractively priced.

“So we are feeling much more constructive about the junior gold shares.” What’s more, “we are in a discovery cycle.” That is, juniors have been able to line up financing with relative ease in recent years… and it’s starting to pay off. “Every day when I turn on Bloomberg,” Rick continues, “I see encouraging news releases from explorers.

“I think it’s very likely that this market gets some completely unexpected surprises to the upside as a consequence of better and better exploration work that is being done. Somebody out there is going to hit something very, very significant, and there is nothing in the world that kicks off these exploration markets like a big discovery. I think we are going to get one this year or early next year.”

No doubt Rick will handicap the most promising juniors next week during our annual gathering. If you can’t join us, you can do the next best thing — secure access to audio recordings of all the main sessions and a concise summary of all the investment recommendations during the “breakout” sessions.

Time’s a-wastin’ if you want access at the lowest available price. It goes up the moment the conference opens next Tuesday. Might as well sign up now… Here’s where to go.

   Fake Rolexes and Louis Vuitton bags are one thing. How about an entire store? That’s what a few enterprising young Chinese folks have pulled off in Kunming, China:

Hint: If it says “Apple Store” beneath the logo, it’s a phony

And if “store” is misspelled, that’s a dead giveaway

An American blogger who lives in Kunming recently came upon three Apple Stores within a 10-minute walk of each other. But something didn’t seem quite right — starting with the words “Apple Store” — which never appear in signage on the genuine article.

BirdAbroad’s — the blogger who asked to remain otherwise anonymous — photos became a worldwide media sensation this week. Today, angry customers stormed the not-Apple Stores. “Where’s my receipt, you promised me my receipt last month!” screamed one customer who dropped $2,170 for a MacBook Pro and an iPhone.

“There is no Chinese law,” an employee told a Reuters reporter, “that says I can’t decorate my shop the way I want to decorate it.”

Are the “gray market” goods at least authentic? “Although they may sell real Apple products, some of those products were not imported through legal means,” says one of Apple’s “authorized resellers” in the city.

Apple itself has no comment — except to refer people to its Chinese website for a listing of Apple Stores.

There are none in Kunming.

   “Recently, I moved out of the U.S. and had to sell a couple of hundred ounces of silver,” writes a reader, wrapping up our precious metals ID discussion and offering a tip some may find useful. “I went to the same broker I bought it from in Lower Manhattan, and he wanted my ID. He didn’t ask for the ID when I bought it two years ago.”

“Luckily, I had a Cayman driver’s license I could show him.”

“Tip: If you visit the Cayman Islands for more than a few weeks, or if you visit the Caymans regularly, they are very happy to give you a full Cayman driver’s license that will serve as a photo ID.”

“So you can always use that if you don’t want to show any U.S. identification. You’ll just need a Cayman address to put on the driver’s license. If you stay at a bed and breakfast, just use that.

“Licenses are available for three or five years, and the five-year license is only about $150.”

   “As always, I’m enjoying my daily dose of The 5,” writes another reader. “I’ve particularly enjoyed some of the more recent issues that I’ve felt have devoted more time to interesting and relevant financial, economic and social news from around the world, and a little less to slanging matches of invective between various camps among the readers.”

“I totally appreciate why you guys find some of these (extremely emotional) reactions amusing and amazing, but still personally feel that The 5 is at its best when bringing us the kind of pertinent vignettes that shed far more light on what’s really going on in the world than the mainstream media!”

“I’m writing to ask about my seat at the forthcoming Agora Financial Symposium — as a reader who became a (satisfied) Equity Reserve member in 2009 and then upgraded earlier this year (presently even more satisfied!) to full Reserve membership but who sadly cannot take up my guaranteed seat at the Symposium in person owing to other commitments, I was hoping you’d confirm for me that I will still get to benefit from all the presentations and information shared, if only in virtual form?”

“Many thanks to all you guys at Agora for the ongoing excellence of your output!”

The 5: Heh, if we offer Reserve members free lifetime admission to the conference itself, we’re sure not going to stiff you for the recordings. Watch for it in your inbox two weeks from today, give or take a day or two. Our top-notch production team turns it around as fast as humanly possible.

If you’re not a Reserve member, you can still lock in the best available price right here.

And if you’ve ever thought about Reserve membership, you have the opportunity to do what this reader did — start out with the Equity Reserve. It gives you access to the work of all five of our stock-picking editors. You get five entry-level newsletters and four more premium advisories with fast-moving high-potential plays.

Best of all, you get it for life… for a one-time entry fee that’s lower than the one-year subscription to all the publications combined. Plus, free admission to Vancouver. And the recordings of each year’s event. We invite you to review all the privileges and benefits of membership right now… the doors to the Equity Reserve will remain open through midnight on Monday.

   “Yes, Americans do lead the world in innovation,” writes a reader who caught Gary Shapiro’s remarks in yesterday’s issue. “And much of this has to do with our patent system. We are the only nation to have ‘first to invent’ patent laws, rather than &#8216first to file.’

“This means anyone can develop a new invention and keep it his own by documenting continued progress. If someone else files for the same thing but has no history of development, this can be challenged. This system gives the little guy a chance to develop an idea into something that can be substantiated and sold or get funding to file the real patent.

“Unfortunately, the &#8216first to invent’ system is about to change. Our lawmakers just signed a change in patent law that would match the rest of the world. &#8216First to file’ means that someone with the largest pocketbook can file today and beat others to the punch even if they didn’t develop it. Most experts in this area feel that going forward, the title of being the most innovative will not be so dominated by Americans.”

“I do not believe the president has signed this bill as of yet, so there still may a chance it won’t go through.”

The 5: The House and Senate have passed different versions that need to be reconciled. But both versions are skewed toward the Fortune 500. “Added expenses could come, in part,” reports the Los Angeles Times, “from multiple filings as inventors seek to protect each step of their progress.”

That costs money and time — which big companies can afford, along with the lobbyists, whose muscle gets legislation like this passed. Mom and pop, not so much.

“What the U.S. is doing to itself is making us go down,” Gary Shapiro says in our film Risk! “We are stealing from our kids. We’re not investing in our future. And we are discouraging innovation in so many different ways.”

“We can’t worry about China. We have to focus on the U.S. And we have to do things right. And that requires great education, great infrastructure and a free market system which provides rewards, and allows people to fail and pick themselves up again.”

“We can’t overtax, overlitigate, and overspend our way out of this mess. We have to be smart and strategic and focus on what we’re good at, which is innovation.”

Have a good weekend,

Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S.You can pick up Gary Shapiro’s book The Comeback for 20% off from Laissez Faire Books. Get yours right here.

P.P.S. Starting Monday, The 5 will come to you live from Vancouver, B.C., where the annual Agora Financial Investment Symposium gets under way on Tuesday.

In addition to familiar faces like Rick Rule, Barry Ritholtz, John Mauldin, Doug Casey and Bill Bonner, we’ll be joined by new ones like David Franklin from Sprott Asset Management, Gary Shapiro from the Consumer Electronics Association and junior mining maven Brent Cook.

Egon von Greyerz will join us from Zurich. Doug Clayton from Cambodia. Peter Cooper will give us a firsthand account of the Arab Spring as he joins us from his perch in Dubai.

Juan Enriquez, who as managing partner of Excel Venture Management helped finance the human genome project, returns. Juan will even join us for a Q&A after the test screening of Risk! right after the opening night cocktail reception. You&#8217ll also hear from 5 regulars Byron King, Patrick Cox and Chris Mayer. Plus, over 39 mining, energy and natural resource companies we&#8217ve vetted will open your eyes to a new world investing in spite of the sovereign debt crisis and the ongoing political drama that dominates the news cycle.

There’s no investment conference like it. And there’s nothing like experiencing the week in person. But if you can’t be with us, you can do the next best thing. You can still hear everyone’s talks almost in real-time… with the audio files we’ll email to interested readers on or around Friday, Aug. 5 — only a week after the conference’s close. You&#8217ll hear spirited debate on strategies to move your money overseas… or putting it to work at home.

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The price of this package goes up as soon as the conference opens in four days. Make sure you get the best available price right now.


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