U.S. Three Years From Greece

Addison Wiggin – August 3, 2011

  • Countdown to Greece…. David Walker with a chart that pinpoints the painful “crossover point”…
  • Two rating agencies punt, a third dithers, while China et al. prepare for “the real downgrade”…
  • Three ways Uncle Sam will put more money in his own coffers… while taking it out of yours… what to do now
  • The Kingdom Tower: Saudi Arabia’s very tall contrarian indicator… what it means for oil prices… and one unlikely way to play it
  • “We now have our own Politburo!” readers rejoice…a firsthand victim of the pernicious “patent troll”… new entries in our “weird fees” file… and more!

   “We are less than three years away from where Greece had its debt crisis,” our friend and IOUSA protagonist David Walker told CNBC yesterday. The former comptroller general is apparently unimpressed by the debt-ceiling agreement in Washington yesterday.

Go figure.

Before the agreement, the $14 trillion national debt was on track to become a $24 trillion national debt by 2021. After the agreement, the 2021 estimate is $21 trillion. Only in Washington is this considered a breakthrough.

Long before 2021, Walker believes we’ll reach a Greece-level debt-to-GDP ratio of 150%. As it is, we’re on the verge of crossing the 100% threshold.

“We are not exempt from a debt crisis,” Walker said. “We’re never going to default, because we can print money. At the same point in time, we have serious interest rate risk, we have serious currency risk, we have serious inflation risk over time. If it happens, it will be sudden and it will be very painful.”

And it will hit you right where it hurts, unless you’re prepared.

   “We may not be Greece just yet,” Pimco’s Bill Gross commented in a similar vein. “Nothing in the congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.

“In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near-unfathomable $66 trillion of future liabilities” — i.e., Social Security, Medicare and Medicaid.

“Aside from the unthinkable outright default, there are numerous ways that a government — especially a AAA-rated one — can employ to reduce its future liabilities.” Mr. Gross then lists four possibilities…

  1. Balance the budget and/or grow out of it.
  2. Unexpected inflation.
  3. Currency depreciation.
  4. Financial repression via low/negative real interest rates.

We can safely rule out possibility No. 1. The budget will not be balanced any time in the next 10 years under the bill signed yesterday by the president. And with GDP growth slowing markedly, the likelihood of “growing our way out of it” with an expanding economy, and thus expanding tax revenue, seems nil.

So that leaves us the other three.

“Unexpected” inflation? That would encompass something like the “chained CPI” measure of inflation that would make your cost of living seem lower than it really is. “Inflation is the result no matter how you coin it,” Gross says, “which puts more money in government coffers to pay their bills and less money in your pocket to pay yours.”

Currency depreciation? Check. “Few Americans are aware that the dollar’s recent 12-month depreciation of over 15% is an explicit tax on their standard of living.”

Financial repression? Check. This is the phenomenon David Franklin of Sprott Private Wealth highlighted last week during our symposium in Vancouver. “If the Treasury,” says Mr. Gross, “is borrowing money from you at .05% for the next six months and CPI inflation is averaging 3%, then savers are being shortchanged.”

   With all these measures in place, it’s perhaps no wonder that both Fitch and Moody’s affirmed Uncle Sam’s AAA credit rating after the president signed the debt-ceiling deal yesterday.

Moody’s at least put him on “negative watch,” in an attempt to salvage what little credibility it still has. But we’re not expecting much more.

The folks at S&P are downing generous quantities of Zoloft and vodka — deciding whether they can really get up the nerve to follow through on their downgrade threat. They wanted $4 trillion less spending over the next 10 years. They didn’t get it. We shall see.

   Most likely, the verdict of the rating agencies is irrelevant, says our friend Michael Pento of Euro Pacific Capital. “The fallout from such a downgrade of U.S. debt will prove quite damaging to Treasury prices,” he wrote in a prescient article on July 21.

“But an even worse outcome will occur,” he went on, “if we continue to raise the debt ceiling without significant spending cuts, and then receive the real debt downgrade from our foreign creditors.”

In other words, the day China decides it’s no longer worth it to collect 0.5% interest on their Treasury bills while their principal degrades 15% in a year. That’s when Uncle Sam’s credit card yanked… for good.

Then it gets interesting. As the White House and Congress “hold late-night sessions and panic for ‘solutions,’ what they decide could wipe out your savings,” we try to relay in our updated forecast. “Destroy your 401(k) portfolio. And eventually even change the ease with which you buy and sell things.

“What they choose to do could drive the price of your home down even further… while driving up the price you pay for everyday items like milk, bread and gasoline.” To that list you can add increasingly aggressive power grabs… and market regulation like you’ve never imagined.

We lay out the scenario in full… with a five-part solution set… right here.

   The markets have already delivered their verdict: Most of the Dow’s 266-point drop yesterday came shortly after President Obama signed the deal into law.

The rout continues today.

The Dow is now below 11,800 following a 900-point controlled descent over the last eight trading days.

   By the same token, gold soared $20 around the same time yesterday… and as of this writing, it’s tacked on another $8, to sit in record territory at $1,668.

Silver likewise crested $41 an ounce and this morning has moved up to $41.71.

   On the other side of the planet, the richest man in Saudi Arabia announced plans for the world’s tallest building. In response to which we must ask: Pride goeth before the fall?

Prince Alwaleed bin Talal — a nephew of King Abdullah — plans to drop $1.2 billion on the Kingdom Tower in Jeddah.

It will take a minute and 40 seconds to reach the top… but how long before it all comes down?

Chicago architects Adrian Smith and Gordon Gill submitted the winning design — fulfilling Prince Alwaleed’s requirement that the building be a kilometer tall. That’s 3,280 feet… topping the current record-holder — the Burj Khalifa in Dubai, another Smith-and-Gill design — by 563 feet.

The Kingdom Tower will stand as a monument to the House of Saud’s oil wealth… assuming they can hang onto it.

   “The Saudis spent decades, and over a trillion dollars, developing their oil industry,” remarks our oil patch veteran Byron King fresh back from Vancouver, but already jumping back into one of his core competencies. “The Saudis buy the best technology, hire the world’s best consultants and employ the very best service companies.”

“Their key industrial goal is to maintain sufficient oil production capacity to meet the needs of their customers. Saudi officials pride themselves on being a ‘reliable supplier’ to world oil markets.”

That’s a role they were first assigned by President Franklin Roosevelt. Only weeks before his death in early 1945, he met with Saudi Arabia’s first king, Ibn Saud, aboard the USS Quincy.

U.S. Navy photo

“Roosevelt offered King Ibn Saud a U.S. security guarantee,” explains Byron, “against both Great Britain and the enigmatic and atheistic Soviet Union. In return, King Ibn Saud promised that Saudi Arabia would grant increased access to U.S. companies to explore for oil in his kingdom.”

“This long-ago meeting was the origin of the 65-year U.S.-Saudi energy-political relationship that is now threatened by Middle Eastern tumult.” A crumbling AAA rating for Washington, the Saudi’s benefactor all these years, isn’t helping matters much.

   “It’s critical for investors to understand the current precarious situation for Saudi Arabia,” Byron says. “Saudi Arabia — and its oil — is surrounded by revolt.” Not just for the impact on the price of oil.

“To the east of Saudi Arabia,” Byron reviews the scene, “there’s Iran, which has been in a continuing state of revolution and Shiite religious revival since 1979. Saudi Arabia and Iran make for longtime rivals, with little love lost.”

To the north, Iraq remains a seething cauldron — even if the scale of violence is less than it was four or five years ago. “Every day in Iraq,” says Byron, “assassins gun down military officers, political figures, judges, clerics and others.”

To the south lies Yemen, home to an unpopular American-backed dictator who clings to power two months after an assassination attempt. “Yemen is reeling from a population explosion over the past few decades. The result is a resource-poor (and, even worse, water-poor!) nation with a demographic time bomb of idle youth living in hopeless economic stagnation.”

   And then on the East, there lies Egypt… where a fascinating drama is now unfolding, almost unnoticed in Western media.

On July 8, the young secular activists who led the protests that unseated president Hosni Mubarak returned to Tahrir Square… and refused to leave. They were upset with the slow pace of reform under the new military government.

These protests continued until last Friday… when the secular protesters were overwhelmed by Islamist protesters, calling for Egypt’s transformation into an Islamic state. Yesterday, the military moved in and kicked out the secular protesters, to the cheers of the Islamists.

The Saudi princes aren’t sure which scares them more — secular protesters seeking democracy or Islamist protesters seeking theocracy. They were much more comfortable with a strongman like Mubarak.

   “The threat to Saudi stability is changing the risk equation and allowing oil prices to drift upward,” Byron concludes.

“If something happens in Saudi Arabia, [oil] will go to $200-300” per barrel, Saudi Arabia’s former oil minister Sheikh Ahmed Zaki Yamani warned in April.

“The demographics, politics and sociology of the Middle East are utterly daunting,” Mr. King suggests, “But the threat to world oil resources and daily oil supplies is very real. By extension, the threat to the global economy is also severe.”

Ironically, situations like this also present investment opportunities for the well-informed.

“We’re looking for investments in the oil patch that will not be overly harmed by the turmoil in the Middle East. But also stand to benefit if the wheels fall off the proverbial bus in that part of the world.

“Who would have expected to find one in Tunisia?”

Who indeed? This is a wild card that could take over the headlines at any moment, with no warning. It’s why Byron is releasing a new special report called “Safe Haven Oil: Power Plays Outside the Danger Zone.”

   Likewise, who’d have guessed that in this unlikely category, American exports to China are exploding?

“Right now we are making about 2 million pairs of chopsticks per day. but we are increasing,” says Jae Lee, the president of Georgia Chopsticks.

By the end of the year, Mr. Lee believes he’ll cut 10 million pairs of chopsticks a day. So far, every single pair has been exported to Asia.

Turns out wood for the iconic rice-grubber is in short supply in China. Here in the states, Georgia’s poplar and sweet gum trees are ideal chopstick material — straight, light colored, with just the right amount of pliability.

Mr. Lee’s factory employs 60 people in Americus, Ga., a town that currently sports 12% unemployment.

“When I opened this business,” says Mr. Lee, “the reaction from my friends and family was ‘Are you crazy? Making chopsticks here?’ But we’ve shown we can make something happen.”

“Prices and markets have evened out so much,” says David Garriga, president of the local development council, “that America can produce these basic things and do well in the market.”

Hard to believe the “great leveling” of wages between the U.S. and China has already taken place… but at the very least, there are 60 people who don’t mind the trend.

   “The comment by Mr. Putin,” writes a reader stung by the Russian leader’s assertion that the United States is a parasite on the world economy, “may prove to be closer to the truth than anything coming out of Washington right now.”

“With this debt deal “we haven’t solved anything, and Putin is calling a spade a spade. We are the biggest rotten apple in this barrel we call the world economy.”

The 5: Not that flagellation will make things any better.

   “Welcome comrade,” writes a reader deftly pivoting from one subject to another. “It’s the Politburo, not a Super Congress!”

“It has finally come down to it,” adds another with the same idea. “I could see it with the Dems and now the Repubs. We now have our own POLITBURO!”

The 5: Vsya vlast sovyetam!

   “We were just hit by a ‘patent troll,’” writes a reader with a firsthand account of a new species of parasite we identified yesterday. “They never contacted us; just filed a federal lawsuit, which we know will cost about $75,000 before it even sees a judge.”

“When I called, I was immediately offered a half-price deal of 7.5% royalty on gross sales since I was ‘first in line’… when I told them the product was a flop and that they’d get little from us even if I were willing to pay, they refused to discuss again and now we’re headed to court.”

“Problem is, my ethics will not allow me to settle… never have, never will.”

The 5: Good luck. Was the patent for… something you invented?


Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S. Washington, D.C., is stepping up its enforcement of recycling laws. Residents of the District’s well-heeled Ward 2 say it’s getting out of hand. We say, welcome to the front lines of the new financial crisis.

“We were issued a $200 citation for not recycling a single can,” says Gina Schaefer, the owner of a hardware store. The Washington Examiner reviewed Ms. Schaefer’s citation. The attached photo shows a single aluminum can surrounded by trash.

The “officials” writing up the citation ignored the city ordinance that allows a trash bin to contain up to 30% recyclables. Regardless, unlike the patent troll victim above, Schaefer says she’ll pony up. The city also holds various licenses she needs to operate. And she has a 140-person payroll to meet.

Get used to it.

State governments are already on the verge of losing federal funding for education and Medicaid. In turn, they’ll cut aid to cities and counties… who will expect you to make up the difference. Without cuts in government services, the fees will have to come from somewhere… we present ample evidence — and an action plan — in this report.


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