The election is over… and nothing has changed. Same House, same Senate and same President. After the 2010 mid term elections where the population was hopping mad at anything and everything, they “threw the bums out.” This has been so pretty much all around the world in elections held for the past year or two. Not so last night… so onward we go and now the markets must deal with the impending debt ceiling and fiscal black hole directly ahead.
As for the debt ceiling (Treasury Quietly Warns: ‘Expect Debt Limit to Be Reached Near End of 2012’ ), there is no question that the ceiling will be raised and possibly even eliminated. I say “eliminated” because raising the limit every year has become embarrassing and there is no point anymore to even pretend that there is a “limit.” Bernanke has already made clear that “infinity” is the limit to QE so the Treasury might as well join the festive ride to infinity!
Zero Hedge put out an article by Simon Black yesterday entitled “It doesn’t matter” and is an absolute MUST READ so that you understand the actual math to the black hole that we’ve fallen into. The important points to understand are that when you add “mandatory spending” and interest payments on debt, you find that “revenues” are not enough NOW, TODAY to cover these. Forget about discretionary spending, cut it out 100% and don’t spend 1 single penny of it, …we are then left with a $250 billion deficit. But wait, it gets worse, MUCH worse. The “interest” portion is actual interest paid at the CURRENT interest rates which are virtually nonexistent. What happens to the “interest” owed when rates go up? Where would rates be if the Fed wasn’t interfering in the Treasury market to suppress rates to zero? Would the market actually clear a 5%? 10%? Would a panic ensue and push rates to 20%+++? Could we even sell all of the bonds that Treasury needs to keep the doors open and function “normally?”
On the revenue side, you could tax everyone making $250,000 per year or more at 100% and still not balance the budget for one year. So here we are racking up over $1 trillion per year on the national credit card that has already “balance transferred” to one which has a “promotional” zero percent interest rate on. We just plug along in the thought that “this is the United States of America,” nothing bad will happen because nothing bad has ever happened.
“We,” as in the current generations, are exactly like the person who grew up “wealthy.” Nothing bad ever happened. Anything that was desired was purchased without thought. “Daddy” always took care of everything …until he and Mom passed away. Then came the inheritance. It was huge! Even more “stuff” could be bought, it meant less work, more play. Vacations, toys and in general an irresponsibility that was just plain old “fun.” And as we all know, “it’s fun to have fun,” right? But the money started to run out and “we” collectively didn’t want to face reality or change our “fun” lifestyle… so we started borrow… and then borrow more and more. Until we not only spent the entire inheritance but encumbered everything available and then some for good measure.
In the words of the author Simon Black, the election last night meant nothing (other than possibly for some social issues). He summed it up perfectly when he wrote “This is not a political problem, it’s a mathematical one. Facts are facts, no matter how uncomfortable they may be. Today’s election is merely a choice of who is going to captain the sinking Titanic.”
As you know, I have said this over and over. If you have not done so yet, please make the connection between a bankrupt government and the currency it issues based on its “full faith and CREDIT.” This is not a hard concept to grasp. I will leave you with a funny story. I once knew a very wealthy young woman who inherited $ millions upon $ millions at a fairly young age. She loved to party and used to light cigars with $100 bills. She rapidly spent through not 1, not 2 but 3 inheritances and at the end when she was out of money, she hitched a ride (because no longer even had a vehicle) in the back of someones pickup truck on a very cold Texas day. I can still remember hearing her say, “Boy, what I would have given for a few of those $100 bills to light a fire and keep warm!” This is a true story… sadly, it is also presently a true story and one that is borne out in mathematics.