What can’t be paid, won’t be paid

Recently in the news:

The Chairman of the US Federal Reserve, Ben Bernanke, made an unprecedented TV appearance on 60 Minutes last night. (WashingtonPost.com)

President Barack Obama will take his economic strategy to Jay Leno's comic couch on Thursday in the first appearance by a sitting U.S. president on a late-night TV talk show. (Source.)

Here is what they will NOT tell you:

What can’t be paid, won’t be paid.

The total American debt of $75 trillion ($250,000 for every American man, woman and child) is too great to ever be repaid in full. As a nation, we can’t pay our debts; not all of ‘em; not even most of ‘em. Individuals are currently holding [paper] debt instruments with a number like “$10,000,” “$100,000” or “$1 million” written on them and believe that those pieces of paper are assets actually worth their declared face value. (Source.)

Those waiting to hear the "D" word from economic experts, talking heads and TV anchors before taking action will most certainly regret their indecisiveness.

By the way, Anglo American has sold its remaining 11.3 percent stake in South Africa's AngloGold Ashanti for around $1.3 billion to Paulson & Co, the hedge fund run by John Paulson. You know, John Paulson, the same guy who shorted subprime two years ago and made an unearthly fortune.

Trust me . . . "This is your captain speaking, everyone remain calm, everything is under control."

Are you scared yet? . . .Why not?

Downsized: Global financial assets (stocks, bonds, used bikes...) lost at least $50 trillion in 2008, an amount equal to an entire year's global output in goods and services.

Thought Experiment: The current economic crisis seems intractable, with no easy solution in view. Think how much harder solving the economic crisis will be after the global food system collapses; for food is but petroleum converted to carbohydrates, protein and fat through the catalytic application of credit.

What's Dead (Short Answer: All Of It)

What's Dead (Short Answer: All Of It)

• All pension funds, private and public, are done. If you are receiving one, you won't be. If you think you will in the future, you won't be. PBGC will fail as well. Pension funds will be forced to start eating their "seed corn" within the next 12 months and once that begins there is no way to recover.
• All annuities will be defaulted to the state insurance protection (if any) on them. The state insurance funds will be bankrupted and unable to be replenished. Essentially, all annuities are toast. Expect zero, be ecstatic if you do better. All insurance companies with material exposure to these obligations will go bankrupt, without exception. Some of these firms are dangerously close to this happening right here and now; the rest will die within the next 6-12 months. If you have other insured interests with these firms, be prepared to pay a LOT more with a new company that can't earn anything off investments, and if you have a claim in process at the time it happens, it won't get paid. The probability of you getting "boned" on any transaction with an insurance company is extremely high - I rate this risk in excess of 90%.
• The FDIC will be unable to cover bank failure obligations. They will attempt to do more of what they're doing now (raising insurance rates and doing special assessments) but will fail; the current path has no chance of success. Congress will backstop them (because they must lest shotguns come out) with disastrous results. In short, FDIC backstops will take precedence even over Social Security and Medicare.
• Government debt costs will ramp. This warning has already been issued and is being ignored by President Obama. When (not if) it happens debt-based Federal Funding will disappear. This leads to....
• Tax receipts are cratering and will continue to. I expect total tax receipts to fall to under $1 trillion within the next 12 months. Combined with the impossibility of continued debt issue (rollover will only remain possible at the short duration Treasury has committed to over the last ten years if they cease new issue) a 66% cut in the Federal Budget will become necessary. This will require a complete repudiation of Social Security, Medicare and Medicaid, a 50% cut in the military budget and a 50% across-the-board cut in all other federal programs. That will likely get close.
• Tax-deferred accounts will be seized to fund rollovers of Treasury debt at essentially zero coupon (interest). If you have a 401k, or what's left of it, or an IRA, consider it locked up in Treasuries; it's not yours any more. Count on this happening - it is essentially a certainty.
• Any firm with debt outstanding is currently presumed dead as the street presumption is that they have lied in some way. Expect at least 20% of the S&P 500 to fail within 12 months as a consequence of the complete and total lockup of all credit markets which The Fed will be unable to unlock or backstop. This will in turn lead to....
• The unemployed will have 5-10 million in direct layoffs added within the next 12 months. Collateral damage (suppliers, customers, etc) will add at least another 5-10 million workers to that, perhaps double that many. U-3 (official unemployment rate) will go beyond 15%, U-6 (broad form) will reach 30%.
• Civil unrest will break out before the end of the year. The Military and Guard will be called up to try to stop it. They won't be able to. Big cities are at risk of becoming a free-fire death zone. If you live in one, figure out how you can get out and live somewhere else if you detect signs that yours is starting to go "feral"; witness New Orleans after Katrina for how fast, and how bad, it can get.

One in five U.S. mortgage borrowers

One in five U.S. homeowners with mortgages owe more to their lenders than their properties are worth, and the rate will increase as housing values drop in states that have so far avoided the worst of the crisis, a new study shows. » Full Story on Yahoo! News

Help?: The Treasury Department claims its mortgage relief plan will help 9 million homeowners temporarily avoid foreclosure. What they really mean is that it will serve to trick these people in continuing to make payments while the house keeps losing value.

FDIC Insured -- backed by the full faith and trust of the US Government

FDIC: $19 billion now backs over $4.8 trillion

There’s nearly $5 trillion worth of insured deposits in the American banking system. But the FDIC’s Deposit Insurance Fund (DIF) is less than 1% of that total: $18.9 billion. And it’s falling fast, down from $52.4 billion (-64%) at the end of 2007. [Having trouble seeing the red highlighted area in the first chart? Then you see my point. I use constant dollars so readers can see the inflation-adjusted growth of insured deposits. Click to enlarge]

FDIC doesn’t have the resources to bail out the depositors of even one large failed bank, much less the entire banking system. And let’s not kid ourselves: The entire banking system remains very much at risk. Source

The bailouts: EXPLAINED!

Here's the Plan: The administration [i.e., Timmy the Tax Cheat and Zimbabwe Ben] intends to give unlimited amounts of taxpayer dollars to the 19 largest banks. Treasury folks will go door to door asking the banks how much stress they feel, the banks will lie, and then the Feds will back up the truck and shovel dollars into the banks until they feel better. Or something like that.

At some point, a boondoggle event horizon is reached, like the light event horizon that exists at the surface of a black hole. Beyond that horizon, the only possible course of action is to create more boondoggles. Source: Orlov

"when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed" - an excerpt from Atlas Shrugged, by Ayn Rand

What is needed, of course, is a concerted effort to build a new, vastly different economy, not squander remaining resources on attempts to resuscitate the current, moribund one. But politicians are never willing to dismantle the system that got them into power, and, like Gorbachev before him, Obama will do all he can to restart the current economy instead of letting it shut down and concentrating on planting the seeds of a new one. Source: Orlov

Europe in trouble

Europe’s banks face a $2 trillion dollar shortage
European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts, according to a report by the Bank for International Settlements.

Europe's economic situation:

• Eastern Europe, along with Russia and the Ukraine, are toppling over the edge. Austria, whose banks have lent them €230bn (75% of its GDP) will go with them.
• Eastern Europe owes $1.7 trillion, $400 billion is due this year.
• Russia has a $500 billion tab it may not be able to cover.
• 60% of Polish mortgages are in Swiss francs, against which the zolty was just halved.
• Hungary, the Balkans, and the Baltics are in the same boat.
• Nearly all this debt is owed (and won't be paid) to Austrian Belgian, Greek, Italian and Swedish banks.
• In addition, Europeans hold 74% of the nearly $5 trillion of emerging markets' debt.
• The German economy will shrink nearly 10% this year, so Berlin will not be rescuing anybody either, not even partners Greece, Italy Ireland, Portugal or Spain.
• The coming economic stress is the stuf that makes for pitchforks in the street.

Source: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4623525/Failure-to-save-East-Europe-will-lead-to-worldwide-meltdown.html (as summarized by CKMichaelson at http://ckm3.blogspot.com/)

Meanwhile Ukraine's gross domestic product has contracted by 20pc over the last year, apparently worse than early Bolshevism or the Stalin famine . . . if Ukraine defaults on its foreign debt – or lets its private companies default on their dollar and euro loans – it will lead to near instant contagion through much of Eastern Europe.

Source: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4691850/Ukraine-must-be-rescued-from-tragi-comedy-for-Europes-sake.html

"This is your captain speaking, everyone remain calm, everything is under control. "

Cheers