What Happens If The Markets Crash In 2013?
Goldman’s Alec Phillips writes in a note that the automatic spending cuts required by the so-called “Sequester” (the spending caps imposed by the 2011 debt ceiling deal) are now a matter of “when” and not “if.”
He examines the sequester as part of the broader fiscal triple threat that we’re seeing right now: Debt ceiling + ongoing budget resolution + sequester.
While the debt ceiling has the potential to do the most damage, from a probabilistic standpoint (because the debt ceiling is unlikely to be breached) the sequester has the most potential to do real harm.
Allowing the sequester to hit would, in our view, have greater implications for growth than a short-lived government shutdown, but would not be as severe as a failure to raise the debt limit. Although Republicans in Congress generally support replacing the defense portion of the sequester with cuts in other areas, there is much less Republican support for delaying them without offsetting the increased spending that would result.
Insane Gov’t Spending and Borrowing
The number of Americans receiving money directly from the federal government has grown from 94 million in the year 2000 to over 128 million today. A shocking new research paper by Patrick Tyrrell and William W. Beach contains that statistic and a whole bunch of other very revealing numbers. According to their research, the federal government hands out money to 41.3 percent of the entire population of the United States each month. Overall, more than 70 percent of all federal spending goes to what they call “dependence-creating programs”. It is the most massive wealth redistribution scheme in the history of the world, and it continues to grow at a very rapid pace with each passing month. But can we really afford this? Of course we never want to see a single person go without food to eat or a roof to sleep under, but can the federal government really afford to support 128 million Americans every month? If millions more Americans keep jumping on to the “safety net” each year, how long will it be before it breaks and it is not there for anyone? The federal government is already drowning in debt. This year the U.S. national debt will easily blow past the 17 trillion dollar mark and we are rapidly heading toward financial oblivion. We are stealing more than 100 million dollars from our children and our grandchildren every single hour of every single day with no end in sight. If we don’t get our finances in order as a nation, what will the end result be?
Federal welfare spending will skyrocket 80 percent over the next decade, according to new analysis by the minority side of the Senate Budget Committee. Here’s a chart, provided by the committee, detailing the growth in spending:
“This chart displays projected federal spending on federal welfare programs over the next ten years, based on data from the Congressional Research Service and Congressional Budget Office,” the Republican side of the Senate Budget Committee explains. “These figures do not count state contributions to federal welfare programs (primarily on low-income health assistance) which brought total welfare spending in FY2011 to more than $1 trillion – dwarfing any other budget item including Medicare and Social Security, and totaling enough to mail every household in poverty a check for 60k each year.”
We Created The Conditions For Catastrophic Failure, The Big Collapse is Still Ahead!
John Rubino published his book in 2004 together with James Turk from GoldMoney. The main theme of the book was that governments in the US lost control over their spending and borrowing, which would ultimately result in some sort of catastrophic crisis. Debt accumulation would continue until some kind of crisis, internally or globally, would force to stop this trend. Most of the predictions have come true, but John Rubino stresses that the 2008 crisis was not the final collapse.He is convinced that the big collapse is still ahead of us.
The same trend was forecasted in the rest of the world and up until now it playing out as expected. Worldwide debt stands at $220 trillion, a figure that should be compared with the global GDP of $62 trillion. That’s a debt to GDP ratio of 350%.
The authors also predicted that money would flow out of paper assets into gold and silver as debt creation gained momentum and went public. It is important to note that gold and silver are the only forms of money that governments cannot debase by creating additional units of it.
An interesting topic is treasury bonds. They are a function of a general flight to safety. The world is still looking at US dollar denominated assets as safe havens even when the US government is taking on an increasing amount of debt. However, it is mandatory to understand that the purchasers in the treasury market are mostly central banks themselves. Their intention is to prop up fiat currencies by buying sovereign debt. What this really means is that governments are taking on too much debt and turning it into currency to cover their debt. Most people don’t see this process; it also remains underexposed in mainstream media. This process, historically, is the final stage of a country destroying its currency. Unfortunately, it is taking place on a global scale, so it will undoubtedly result in an implosion of the whole fiat currency concept.
Where do we stand today? John Rubino points to a number of important statistics since 2009 (US only) to validate his thesis and forecast of a final collapse:
- The number of people with jobs (people actually working) is up with only 2% while the number of people on disability is up with 15%.
- People living on food stamps are up 44%, standing at 46 million currently.
- One in four households lives on less than $25,000 a year.
- 2012 was the 4th consecutive year in which the US ran trillion dollar deficits.
- Total debt has gone from 1.5 times GDP in 1980 to 3.5 times GDP today. This means that the US has $175,000 of debts per citizen or $700,000 per family, calculated with the officially reported debt. When unfunded liabilities are including in the calculation (Medicare, Medicaid, social security …, which all are equally debt), the debt per family stands at $2 million.
These trends are playing out as forecasted. However, in terms of timing things are unfolded at a much slower pace than expected. The path to the final collapse has been slowed down by two factors:
- Human nature. It takes a long time for people to change their minds on something. Our global society still believes that paper currencies still hold their value over time as they keep on accumulating and saving fiat based money.
- The printing press. This is a phenomenal tool for fooling people. Governments are able to create as much currency as they want. There are limitations, however. “Yes they can” set interest rates at levels that signal to the market that economic conditions are fine. Even when underlying conditions are deteriorating, as they are today as shown in the above figures, lending at a very low interest rate gives the impression of a good creditworthiness.
Goldman Sachs And The Big Hedge Funds Are Pushing Leverage To Ridiculous Extremes Goldman Sachs Has Total Exposure To Derivatives Contracts That Is More Than 362 Times Greater Than Their Total Assets!
As stocks have risen in recent years, the big hedge funds and the “too big to fail” banks have used borrowed money to make absolutely enormous profits. But when you use debt to potentially multiply your profits, you also create the possibility that your losses will be multiplied if the markets turn against you. When the next stock market crash happens, and the gigantic pyramid of risk, debt and leverage on Wall Street comes tumbling down, will highly leveraged banks such as Goldman Sachs ask the federal government to bail them out? The use of leverage is one of the greatest threats to our financial system, and yet most Americans do not even really understand what it is. The following is a basic definition of leverage from Investopedia: “The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.” Leverage allows firms to make much larger bets in the financial markets than they otherwise would be able to, and at this point Goldman Sachs and the big hedge funds are pushing leverage to ridiculous extremes. When the financial markets go up and they win on those bets, they can win very big. For example, revenues at Goldman Sachs increased by about 30 percent in 2012 and Goldman stock has soared by more than 40 percent over the past 12 months. Those are eye-popping numbers. But leverage is a double-edged sword. When the markets turn, Goldman Sachs and many of these large hedge funds could be facing astronomical losses.
Sadly, it appears that Wall Street did not learn any lessons from the financial crisis of 2008. Hedge funds have ramped up leverage to levels not seen since before the last stock market crash. The following comes from a recent Bloomberg article entitled “Hedge-Fund Leverage Rises to Most Since 2004 in New Year“…
But hedge funds are not the only ones flirting with disaster. In a previous article about the derivatives bubble, I pointed out the ridiculous amount of derivatives exposure that some of these “too big to fail” banks have relative to their total assets…
According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are…
Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)
Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)
Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)
Bank Of America
Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)
Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)
Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)
Take another look at those figures for Goldman Sachs. If you do the math, Goldman Sachs has total exposure to derivatives contracts that ismore than 362 times greater than their total assets.
Roubini: ”We have low growth, we have low inflation below target, we have zero federal funds…in 2015
“We have low growth, we have low inflation below target, we have zero federal funds…in 2015, we’re doing QE3 (a third round of quantitative easing), maybe QE4,” he said. “Every time there is a global bout of risk aversion people go into the dollar and Treasurys,” he said. “At the peak of the crisis, the dollar rallied because we are the safest,” he told the Reuters conference.
“Here you have five or six reasons why, in spite of large and unsustainable debt and the [political gridlock] the bond vigilantes are asleep at the wheel- and they’re going to stay like that for a while.”
He warned about the danger of “bond vigilantes,” bond market investors who protest against monetary or fiscal policies that they consider inflationary by selling bonds, a yield-increasing move.
The Golden Age Of US Corporations Is Ending: S&P 500 Cash Has Peaked And Is Now Declining
The implications of this chart may be innocuous, or, more likely, they may be very profound….
Poverty Trap: Americans Are Broke, And Getting Further In Debt
Just as the president reminded us yesterday we are not a deadbeat nation, merely borrowing money today to pay the bills of yesterday, so, as the NY Times reports in this all-too-real article, many of the citizens of the US are also living not just paycheck-to-paycheck but short-term-loan-to-short-term-loan. As one debt-consolidation service noted “They’ve been borrowing just to meet payments on previous loans; it builds on itself.” Rings an awfully loud bell eh? (and yes, we know the government’s finances are not run like a households – though at some point the check book needs to balance). People in tough ‘economic’ situations fall into the ‘poverty trap’, borrowing money at ever higher interest rates in a shell game to keep previous borrowers at bay. The average debt for households earning $20,000 a year or less more than doubled to $26,000 between 2001 and 2010 – as people dig deeper, precisely because they long to escape. As the focus of the article notes, “the belt-tightening was the easy part… the larger problem was cash-flow.” Critically, experiments show that ‘economic’ scarcity by itself – independent of personality or any other factors – fuels a drive to borrow recklessly.
Via NY Times:
The belt-tightening was the easy part. Cancel the cable. Skip the air conditioners. Ration the cellphone, unplug the wireless Internet, cook rice and beans — done, and done. The larger problem for LaKeisha Tuggle, 33, who had lost her public relations job, was cash flow: After her unemployment insurance and savings ran dry, there was none.
The usual explanations for reckless borrowing focus on people’s character, or social norms that promote free spending and instant gratification. But recent research has shown that scarcity by itself is enough to cause this kind of financial self-sabotage.
“When we put people in situations of scarcity in experiments, they get into poverty traps,” said Eldar Shafir, a professor of psychology and public affairs at Princeton. “They borrow at high interest rates that hurt them, in ways they knew to avoid when there was less scarcity.”
People dig deeper precisely because they long to escape.
She recently made an appointment at GreenPath, a national debt-consolidation service, to see whether she could begin to pay down what she has borrowed. “By the time people come to see us, they have no more credit to use,” said Kathryn Moore, a counselor at GreenPath. “They’ve been borrowing just to meet payments on previous loans; it builds on itself.”
Long Term Unemployment at Highest Level Since WWII
Long term unemployment under President Obama is at the highest level since at least the end of World War II, threatening to create a permanent underclass of workers who will find it difficult or impossible to obtain jobs in the future. What’s more, Obama’s insistence on repeatedly extending long term unemployment benefits may be fueling the unemployment problem.
According to data recently released by the St. Louis Federal Reserve, the average duration of unemployment is now at about 40 weeks, double the previous highest level of about 20 weeks that prevailed during the last three recessions.
Why U.S. might be ‘a nation of deadbeats’
Consumers have been paying down some debt but walking away from even more, Brett Arends says.